S. HRG.

110602

WORKSHOP ON OIL PRICES

WORKSHOP
BEFORE THE

COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON

WHY OIL AND TRANSPORTATION FUEL PRICES AND THIS WINTERS EXPECTED HOME HEATING FUEL PRICES WILL BE SO HIGH, AND WHAT
CAN BE DONE TO ADDRESS THESE SITUATIONS

JULY 17, 2008

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COMMITTEE ON ENERGY AND NATURAL RESOURCES

JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii
BYRON L. DORGAN, North Dakota
RON WYDEN, Oregon
TIM JOHNSON, South Dakota
MARY L. LANDRIEU, Louisiana
MARIA CANTWELL, Washington
KEN SALAZAR, Colorado
ROBERT MENENDEZ, New Jersey
BLANCHE L. LINCOLN, Arkansas
BERNARD SANDERS, Vermont
JON TESTER, Montana

FRANK
JUDITH

PETE V. DOMENICI, New Mexico

LARRY E. CRAIG, Idaho
LISA MURKOWSKI, Alaska
RICHARD BURR, North Carolina
JIM DEMINT, South Carolina
BOB CORKER, Tennessee
JOHN BARRASSO, Wyoming
JEFF SESSIONS, Alabama
GORDON H. SMITH, Oregon
JIM BUNNING, Kentucky
MEL MARTINEZ, Florida

ROBERT M. SIMON, Staff Director

SAM E. FOWLER, Chief Counsel
MACCHIAROLA, Republican Staff Director
K. PENSABENE, Republican Chief Counsel

(II)

CONTENTS
STATEMENTS
Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico ........................................

Diwan, Roger, Partner and Head of Financial Advisory, PFC Energy ...............
Domenici, Hon. Pete V., U.S. Senator From New Mexico ....................................
Reid, Hon. Harry, U.S. Senator From Nevada ......................................................
Yergin, Daniel, Chairman, Cambridge Energy Research Associates ..................

(III)

1
7
2
10
3

WORKSHOP ON OIL PRICES

THURSDAY, JULY 17, 2008

U.S. SENATE,
NATURAL RESOURCES,
Washington, DC.
The committee met, pursuant to notice, at 9:05 a.m., in room
SDG50, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
COMMITTEE

ON

ENERGY

AND

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S.

SENATOR FROM NEW MEXICO

The CHAIRMAN. Why dont we get started? Let me welcome everybody.

This is being held in the nature of an oil price workshop to talk
about two issues, the way I see it: first, the high price of oil and
the resulting high price of gas at the pump, which people are faced
with today; and second, the high price for heating fuel which we
are seeing and which we are expected to see more of as we get closer to the winter, particularly natural gas, propane, home heating
oil.
I think we are all aware. All of us hear from our constituents
about the enormous burden that this is on families throughout the
country, these increased prices and the dramatic increase in prices
that they have faced in recent months, that we have all faced. Also,
the burden that this is putting on our economy is obvious, and I
am sure we will hear some about that.
The question that we are going to try to grapple with here for
the next few hours is what are our realistic options for dealing with
these very real problems. My own view is that we have had a lot
of political statements. We have not done enough perhaps to actually debate the real issues and what concrete actions could be
taken that would have an impact that was positive for the American people.
Three areas that we have all, I think, begun to focus on. One relates to the functioning of markets, the whole issue of speculation,
the extent to which that is a factor in explaining, causing the high
prices. Second, what could be done to further reduce demand. Are
there steps that we could take as a policy matter in that regard?
Third, what could be done to increase supply. I think those are
three large areas that I continue to hear about, and I am sure some
of you may want to add to that list.
My sense is that the way forward will involve actions that the
President and the Administration can take. Let me just mention
and congratulate the BLM on the action they announced yesterday
(1)

2
to have a large oil and gas lease sale in the northeast portion of
the National Petroleum Reserve, Alaska. I think that is positive,
and I compliment them on that announcement. So there are actions
the Administration can take.
There are actions that Congress can take, and of course, that is
the purpose of todays workshop, is to explore those actions. One
of those, of course, is the bill that Senator Reid is bringing to the
Senate floor today and will be the subject of a lot of debate on the
Senate floor, I am sure. Perhaps our colleagues or our witnesses
will have some comments on the value of us trying to address this
issue of speculation.
Then the third area is actions that the American people can take
to help with this problem. Of course, most of that falls in the area
of reducing demand. I think there has, obviously, been a substantial reduction in demand that has already been reflected in statistics, but there may be a additional steps that can be taken there.
So those are the subjects that I thought it would be useful to address.
Let me just say something about the procedure and then defer
to Senator Domenici.
I think the way we were planning to do this, we have two excellent witnesses here, Dr. Yergin and Mr. Diwan, who are here to
speak as experts. We are asking them to each take about 10 minutes, give us their ideas as to the causes of the current high prices,
and their recommendations for actions we ought to take.
After they speak, I was hoping to ask a few questions. Senator
Domenici may have questions as well, and then we open it up to
everybody here just on a first come/first serve basis. Whoever has
a question or a point of view or something they want to say, we
are glad to hear it.
So let me defer to Senator Domenici at this time.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM
NEW MEXICO

Senator DOMENICI. Senator Bingaman, first of all, you and I get

to hear each often and we get to talk a lot. I hope we will hear
from some others and I hope that perhaps we will hear less from
you and I, not that we do not have a lot to offer, but we do get
to talk about this subject frequently.
I thank the two expert witnesses for coming.
A little later on in the program, I will submit just a few quotes
from experts of their caliber who have clearly said that the problem
we have got with price is supply and demand. Yet, it seems like
there are those who continue to think that we are going to fix this
problem some way by a bill that the majority leader has in mind
that has to do with speculation. I am perfectly willing, as one Senatorand I say that to Senator Bingaman right nowto consider
legislation regarding the issue that I have just described.
But I frankly believe that there is no question that we have a
rare opportunity to share with the world some increased production
potential of a pretty large dimension as a result of the offshore potential of the United States. With only about 15 percent of that offshore having been put up for lease, with almost 85 percentnot all
of it is great oil production property, but 85 percent not used, it

3
seems to me we ought to be in a bipartisan mode sitting at a table
and hand in hand trying to figure out how we get to a point where
we can start to maximize the use of that great asset which we have
before us which we have not used for 27 years. I mean, it is something to lock up an asset for 27 years and find out, all of a sudden,
that the American people have found it along with us, and that we
have got to do something about it.
I hope we hear today about that, and I hope Senators express
themselves on that subject.
I for one introduced a bill 3 and a half months ago. I think many
of you know about it. I believe if that bill would have been adopted
or would be adopted now, that it would make a dramatic change
in the way supply and demand came out in terms of the United
States versus the assets that we own in the offshore that belong
to our people.
With that, I would like to put my statement in the record and
say that I hope to learn from these experts whom I have read
about and whom I think have stood pretty stalwart for the proposition that supply and demand is the problem that is affecting the
price of oil and ultimately the price to consumers more than any
other single thing. I thank them for all they have contributed, and
I hope to hear more from them today.
Thank you, Senator Bingaman.
The CHAIRMAN. Thank you.
Our witnesses are Dan Yergin who is the chairman of the Cambridge Energy Research Associates who is a frequent testifier before our committee and many congressional committees. We, obviously, welcome him back. Roger Diwan, who is a partner and head
of Financial Advisory, PFC Energy. We very much appreciate you
being here as well.
So why dont you go ahead and go in that order, unless you have
a reason to go in a different order, and give us your thoughts. After
we hear from both of you, we will begin some questions.
STATEMENT OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE
ENERGY RESEARCH ASSOCIATES

Mr. YERGIN. Thank you, Senator Bingaman and Senator Domenici. I am very pleased to be here to participate in this workshop,
a very constructive way to try and address these basic questions.
So I hope in my few minutes here I can provide a little bit of a
framework for the discussion that will ensue over the next couple
of hours.
Obviously, the very fact that we are together shows the concern.
There is no question as a country and as a world that we are living
through an oil shock right now with tremendous impacts around
the world.
I think also, as suggested, we are, we might say, at a break point
in terms of which we are starting to see some major changes which
will play out over the next few years.
I think, Senator Bingaman, your emphasis on energy efficiency,
that that is one of the three things that we really need to focus on,
is very much to the point.
I will say a few words about how we got here and how we might
get out of here, but I would want to say, in terms of policy, it seems

4
to me as a country we need to get kind of beyond this either/or energy debate and instead take a sort of more ecumenical approach
that recognizes the critical requirements of supplying energy to our
$14 trillion economy.
The second is to recognize that we really do have an investment
problem in energy and we are playing a game of catch-up right
now.
The third is talking about the response of markets.
The fourth, over the last several months, I have become persuaded that expectations about what is going to happen 3 to 5
years from now are really having a very important impact on price
formation.
That we are in an oil shock is completely clear. It coincides with
the credit crisis. That is why people, for the first time since the
1970s, are talking about stagflation again. That concept was supposedly banished after the 1970s. We hear predictions of $200 or
$250 a barrel oil. So it is quite appropriate to ask what is happening and why is it happening.
There is a tendency always to try and find a single explanation,
but for something this complex, I think there is not a single explanation. A lot of things have come together, and to kind of make
sense of it, I would like to sort of suggest the heading of the traditional fundamentals and the new fundamentals.
The traditional fundamentals are what Senator Domenici referred to, supply and demand, basically the success of the global
economy, 5 years of the best economic growth that we have had in
a generation and rising incomes means rising energy consumption.
Just one set of numbers shows between 1998 and 2002, world oil
demand increased by 4 million barrels a day. Over the next 5
years, it increased by 8 million barrels a day, and that was because
of economic growth. So as a result of that, we are in a tight supply/
demand. Lead times in the energy industry are long. Things do not
happen overnight.
But you might ask, well, why are things not happening faster?
There, I think, are three big reasons for the rather slow supply response. One is the question of access around the world to areas for
development. The second is the uncertainty about investment, fiscal, regulatory regimes again around the world. The third is something I will come back to, the shortage of people and equipment.
I think the other major traditional fundamental is the familiar
one of geopolitics. We have not had a mega-disruption like the
1970s. But when you add it up, there are 2 million or 3 million barrels a day that are missing, and you start with Nigeria where, at
some points, up to 40 percent of Nigerian supply is out. That is one
of our major sources of imported oil. You can just go down the list
of Venezuela, Iraq, Mexico, Russia, and you see this adding up of
missing supply. When you have a tight market, it is vulnerable to
the impact of disruptions. It is vulnerable to price.
I think there is no question that the dangers and uncertainties
related to Irans nuclear program are a distinctive part of the oil
market today, and there is clearly an Iranian risk factor in the
price of oil today.
So those are the traditional fundamentals.

5
When I say the new fundamentals, what are they? I think there
are two. One is this doubling of cost. Today if somebody goes out
and wants to develop a new oil field, you are going to budget it at
twice what you would have budgeted it at just 4 years ago. It is
a shortage. We created what we call IHS/CERA Upstream Capital
Cost Index, and it shows that in fact, it is actually something over
a doubling in the last 4 years. So that means every dollar only buys
you half as much as it would have done 4 years ago.
What is the reason? It is the shortage of engineers and scientists,
labor, equipment, steel, commodities. Right now we are actually
although we talk about the oil shock, there is a steel shock going
on. Since the first quarter of this year, steel prices globally have
gone up 40 percent, and that again goes into the costs of development.
So all these costs are up, and that then leads to delays, postponements, in some cases cancellations. In other words, we can think
there is a supply issue and then there is the supply chain. It is
these issues about the supply chain that are a part of the delay in
terms of response. New equipment, new petroleum engineers get
trained, all of that happens, but it does not happen overnight.
The other issueand this is one that is obviously very much on
the minds of all the Senators hereis what we might call oil is the
new gold; that is, oil is a storehouse of value. Increasingly the fact
that oil, along with other commodities, has been seen as an asset
class by financial investors as one that is not connected to what
happens to equities, bonds, and real estate. It has always been
there, but I think only in the last few years has it really emerged
on the scale that we have seen.
None of you need to be told that the role of financial markets in
the oil price is a very controversial subject and the range of views
is from that speculation is the heart of it to that it is all about supply and demand. I am struck by the fact that when we use the
word speculation, it has so many different meanings. There is a
technical meaning of those who provide liquidity in a futures market. It can suggest manipulators. It can suggest risk takers. It can
suggest irrational exuberance. I think that the effort to get much
more transparency and knowledge about the financial markets,
whatever your point of view, is a very important part of this dimension.
But it is worth considering that people have all different reasons
as financial investors to be investing in commodities like oil. It is
a hedge against risk. A pension fund might want to do it to hedge
their portfolio against a conflict in the Middle East. There is a
shortage psychology that the world is running out.
I think what has happened with the dollar, particularly since
last July, has had a big impact, and the U.S. credit crisis is part
of why we have seen commodity prices high. So it is ironic to think
that the crisis that started in the subprime mortgage market in the
United States has traveled around the world and, through the medium of a weak dollar, has come back home to Americans in the
form of high prices at the pump.
The second point I just wanted to say is that we are at a break
point I think. About 2 years ago, we did a scenario paper we called
Break Point, oil getting to $120 to $150 a barrel. I think at that

6
time most everybody, including us, would have put about a zero
probability on it happening. But the question is what happens
when you get to that level, and I think we are seeing it in terms
of technology and the dramatic change particularly in what is happening in the focus of the transportation and the automobile industry. In fact, last year, we probably had peak demand in terms of
gasoline in the United States. It is probably going down.
The third pointand Senator Bingaman emphasized thisis we
have a tremendous potential for energy efficiency, both short- and
long-term. The U.S. has double its energy efficiency since the
1970s. Over the next couple of decades, why can we not double it
again? I also wonder, in terms of a much more concerted in terms
of communication, whether we could save 600,000700,000 barrels
a day in gasoline with no discomfort to the American people
through shaving, minor changes that people would make, and that
would make a difference in the market.
So I think the question, Senator Bingaman, you had in your
speech yesterday, why is this not more highly focused upon, I think
is a very appropriate question.
So in terms of just conclusion on policy, as I said, I do think we
ought to really avoid the either/or. We kind of do need everything.
Renewables will become more important, but as they become more
integrated into the existing energy infrastructure, it raises questions about how they get integrated into it. In the meantime, we
look at, as I said, our $14 trillion economy. How do we run it? How
do individuals, how do families continue to pursue their lives and
their careers in that energy is central to it?
I think the second question is encouraging timely investment,
and that is an issue not only in the United States, but around the
world. It is a vigorous game of catch-up. I think it needs to be
thought of in terms of our overall foreign relations. The United
States played a critical role in the 1990s in terms of getting the
Baku-Tiblisi-Ceyhan pipeline built, which brings 700,000 barrels of
oil now to the Mediterranean. I think we ought to be asking where
else in our foreign policy could we do things that would enhance
supply.
I think maybe it is just one of the concluding points. It is striking
that we are both more integrated into the global energy marketplace than we have ever been before, and at the same time, we
have less leverage over that marketplace because our share of the
market has gone down. National oil companies really have the
dominating position now, with over 80 percent of world reserves.
The five super majors account for less than 15 percent of production. China and India are becoming more important. All of this emphasizes the need for a cooperative, multifaceted approach to relations with other producers and certainly with other consumers.
I think the last point I would just like to make is about expectations. As I said at the beginning, it seems to me that this tight
market and concerns about Iran are two of the principal things in
the price today. But there is this shortage psychology, a belief in
two things: one, that demand is going to go through the roof in 4
or 5 years, looking at China; and second, that there is going to be
a physical shortage in 4 or 5 years. I think that is particularly
strong in the markets, and things that are significant get dis-

7
counted like these very large discoveries off the coast of Brazil,
which are perhaps equivalent to a new North Sea. People do not
pay attention to those. So I think thinking about expectations and
their role on price would be constructive today.
As I said, avoiding either/or, new supplies, renewables, greater
efficiency, all of those come together. All of that would be a great
contribution to reducing the pain and pressures that Americans are
feeling at the pump and the difficulties faced by American businesses, small and large alike. I think this would be a fundamental
contribution both to the prosperity of our Nation and to the prosperity of the global economy, of which we are such a central part.
Thank you.
The CHAIRMAN. Thank you very much.
Mr. Diwan, why do you not go right ahead?
STATEMENT OF ROGER DIWAN, PARTNER AND HEAD OF
FINANCIAL ADVISORY, PFC ENERGY

Mr. DIWAN. Thank you for inviting me this morning. I would like
basically not to repeat a lot of what Dr. Yergin has said because
I agree with a lot of it, but really focus on a few points I think
which could help us dive more into the subject. I would like, anyway, to provide a more detailed framework to understand price formation and how we got to $135$140 oil.
I think the important moment is really what happened between
2003 and 2005 where really the world faced two shocks, a supply
shock and a demand shock at the same time, a supply shock where
we had what were called rolling supply disruptions between Iraq,
Venezuela, and Nigeria, which basically rolled on for a number of
years and removed a lot of oil from the market. At the same time,
we had this incredible demand surge not only in the emerging
world but also, in the early part of this period, in the United
States. These two shocks together have wiped out all the spare capacity which existed in the world.
Basically between 1985 and 2005, OPEC had a lot of capacity
which was unused. That unused capacity waited on the market.
There was no reason for prices to increase because every time
prices increased, OPEC added barrels on the market. By 2004
2005, that spare capacity basically resided only in one country. All
the other countries were producing at full capacity, and there were
not any more members of the cartel, if you want. They were like
any other producers. Only Saudi Arabia had spare capacity, and
that number is open to debate. Saudi Arabia says it is around 2
million barrels per day, and let us assume it is 2 million barrels
per day.
When you have a market without spare capacity, we discovered
that it works very differently because you have really risk only on
the upside. You do not have down-side risk. You have fears of more
supply disruption, fears of fields not coming on line, delays, et
cetera. So suddenly the balance, when you are looking at oil prices,
the chances that they would go up versus going down, is really
skewed toward 90 percent going up. That has created, if you want,
a lot more investment into the commodity directly.
So this is the moment where you start to see the financial industry start to get interested in the commodity. Before that you had

8
too much of an OPEC risk, if you want, that you would invest in
and one OPEC country would do something and you would lose
your money. That risk was too big.
So that skewing of the risk on one side started to build up. Clearly the fundamentals were right, and that is really the core reason
where we are here.
But over the next few years, basically between 2004 and now,
something which is very important happened in the market. In a
way, Dr. Yergin talked a little bit about it. I would like to focus
on it, which is the supply narrative. We do not have enough supply.
There is not enough oil coming on line. Projects are always delayed.
Access is completely closed. It is true, over the last 4 or 5 years,
we have seen non-OPEC supply being very, very sluggish and barely increasing every year. That has created more and more talk
about peak oil, especially in the non-OPEC area. Often these issues
are misunderstood and put in fairly simplistic terms, but there is
a clear concern here that supply is not rising on a global basis from
non-OPEC. The only places where really we are investing in a massive way is places like Brazil or like Saudi Arabia right now.
That supply narrative has changed the expectation, and this is
why around the middle of 2006, you saw the long-term price expectation rise suddenly from $40 to $100, where suddenly the market
started to price scarcity in the future. The scarcity narrative is extremely important to understand why you have financial players
coming into the market. So the fundamentals have driven, if you
want, what I call the financialization of oil markets. Suddenly
when the financialization of oil marketsnow oil is a financial
asset. It is not anymore really purely a fundamental supply and demand play.
In this environment, really you ended up with what I describe
to my clients as really two set of news. You have the bullish news
and prices will go up or the very bullish news where the price goes
up very much. The market is only attuned to these types of news.
You know, something happened off the coast of Brazil or a new
field comes on line, it is completely discounted. The news which are
counted on are only the ones which reaffirm your belief that we
have a problem in the future, that demand is really rising very fast
in China and the Middle East, that prices are not having an impact, and supply is not coming on line.
That takes us to the next phase really where sometime early in
2006 suddenly oil has really become a financial asset, and it has
almost left the supply and demand fundamentals because a lot of
the players and the majority actually of the players on the futures
markets are financial players. They are not what we call commercial players, airlines, oil companies, et cetera.
In the data that CFTC released a few weeks ago where they really broke down a little bit the players, what you realize is the commercial players, oil companies and airlines, people who physically
buy and sell oil, represent something like 27 percent of the market
right now. The rest is what you would call speculators, what I
would call investors, if you want, where they decided that oil is an
asset class and they are making constant arbitrage between the
dollar, between inflation rates, between the expectation of different
assets, and they are making portfolio assignments. They decided

9
how much money they want to go into a commodity versus into dollars.
The correlation is extremely strong, and Dr. Yergin alluded to
that. But think about it. Between July and now, the negative correlation between oil and the dollar is something in the order of
above 90 percent. So the primary driver of oil prices over the last
9 months has been the dollar value. It is people deciding to hedge
their dollar, if you want, with oil as they do with gold and other
commodities. The problem is oil is a small pool compared to the
very large pool of money which is the dollar. The way I describe
that you have a very large lake which is overflowing into a very
small pond. This is the money flowing to the small pond, the small
pond being the oil market.
That notion that oil is an asset classnow you see it every day.
I mean, when you look at the daily movement in oil prices, you
cannot relate them to any fundamentals event. You can very often
relate them to what I call the macrofundamentals, the dollar, the
inflation expectation, what the Fed is doing, what the ECB is
doing, et cetera.
How did we get there? How come the financial players have
taken over this market and represent really the largest section of
it?
In a way, what happened is we had a tight regulatory environment to allow or not allow financial players to come into the commodity market, but in a way we closed the door on that years ago.
Sometime 10 years ago, we kind of opened the window, and they
came back through window. What I call the window is the ability
for index funds to be linked to commodities and bring money which
is basically not regulated by the exchanges, where you do not have
really position limits.
So you talk to endowments, pension funds, I mean, probably all
our pension funds here are now putting money in oil commodities
rather than what they used to do in the past to put it in the equity
and the stocks of the oil companies because it correlates in their
portfolio. So they are making big bets and they are trying to basically hedge our pensions mostly for the decline of the dollar. We
have allowed them to do that.
The question is should we allow them to continue doing that or
should we limit their ability to do that? Should we have them come
back, if you want, in the regulatory environment which we had in
the past, that each institution has a limited amount of commodity
it can buy or not? Those are important questions.
Obviously, they do not obviate the root cause of the issue here
which is tight supply and demand where we still have demand
growing at $140 oil and supply is not coming on line. In an environment where supply is not coming on line on $140 oil, the only
way you can bring things in balance is push prices to the limit
until you break demand. The reaction is coming from the demand
side, not from the supply side in the short term, if you want. So
the players keep pushing prices up until you break down demand.
We are starting to see that in the U.S., but we do not see it on
a major level globally. We still have good product demand growth
between the Middle East and Asia, and that is keeping the supply
balance very tight.

10
So that is what I have to say today, and thank you for giving me
the opportunity.
The CHAIRMAN. Thank you very much. I thank both of you for
your excellent testimony.
Senator Reid is here I see, and maybe before I ask any questions
or Senator Domenici does, did you have any statements you wanted
to make or any questions?
STATEMENT OF HON. HARRY REID, U.S. SENATOR
FROM NEVADA

Senator REID. Mr. Chairman, I appreciate it very much. The Senate opens at 10 oclock and I have to be there. So I appreciate very
much you and Senator Domenici allowing me to say just a few
words about this most important discussion that you are leading
here today.
With gas and oil prices setting record prices almost every day,
it is clear that the American people are suffering and deserve our
attention and hopefully some solutions. If there is one magic pill
that will bring energy prices back to sanitythere is not one. Of
course not, but I am hopeful and confident that if we cast aside
partisan divide that has enveloped Washington, we can begin to
stem this growing crisis.
The issue spreads far wider than the reach of the Energy committee alone. It is fair to say that nearly every committee here in
the Senate has a piece of this intricate oil and gas puzzle, whether
it is speculation, the weak dollar, political instability in the Middle
East, growing cleaner, more affordable alternative fuels, tax incentives, increasing the efficiency of our transportation sector. So I am
sure that other committees will follow your leador at least I hope
they doMr. Chairman Bingaman, to join the process of finding
cost effective, sensible solutions to our dangerous addiction to oil
and the high oil and gas prices that are crippling our economy and
affecting the world economy.
The crossroads of record prices and every-increasing global demand for oil has brought our Nation and the world to a crossroads
we knew would come 1 day. For America, the yawning gap between
our meager petroleum resources and our enormous dependence on
consumption of oil has caught up with us. We cannot continue forever to consume 25 percent or more of the worlds oil when we have
less than 3 percent of the worlds supply. It is just simple math.
With the many regionally based energy interests in our country,
moving Congress toward a cleaner and safer energy future has
never been easy. That critical task has been made more difficult in
my opinion with a President that has not shown the necessary
leadership to end our addiction to oil and move toward clean renewable fuels.
That said, we did make progress last year, bipartisan progress.
Was it enough? Of course not, but it was some progress. We
worked to pass last years landmark energy bill which moves us
slowly in the right direction. We all know that that bill is only a
small down payment on the transformation that must take place
if we are going to meet the urgent economic, national security, and
global warming challenges that we cannot afford to ignore any
longer.

11
So I hope today this eventand I am confident it will bring forward new ideas, sensible ideas that can help relieve the enormous
burdens of high gas prices on consumers in the near term and the
long term.
It was just a few weeks ago that I was here testifying, and I
looked next to me and there is T. Boone Pickens, one of my mortal
political enemies for all these years. Suddenly because of what I
had heard on public radio that morning, I realized he had become
my political friend because here is a man who not only has helped
us recognize there is a problem, but he is focused on a solution. I
am so appreciative of T. Boone Pickens. He is an oil man, a
staunch conservative, but he realizes the enormity of our energy
crisis. That is a pretty good model for the kind of bipartisanship
it will take to solve this problem.
This week I have introduced one solution on the Senate floor, I
hope, legislation to stem the excessive speculation in the energy
markets that many economists believe accounts for 20 to 30 percent, or more some say, of the price we pay at the pump.
Eighteen years ago the Commodity Futures Modernization Act
for the first time created a whole new class of traders to enter the
commodities market without the same constraints faced by people
trading in the actual physical commodities. Because of this new
lawa mouse clickthe energy market was born overnight. That
means that right now Wall Street traders can raise oil and gas
prices simply by logging onto their computers and executing trades
without regard for anything but their own profits. Traders are bidding up prices by buying huge quantities of oil just to resell at an
even higher price. The result has been a new class of investor getting rich by buying oil, only to turn around and sell it at an everhigher price, only to stick consumers with the bill, never, ever intending to take control of that oil actually.
Our legislation that was introduced yesterday will finally hold
the energy futures market to the same standards of accountability
that other futures market are held. This is a matter of fairness and
common sense. We are not saying that all speculation is bad. It can
be very healthy in a well functioning market. It can help the market find the most efficient price. But without proper market oversight, speculation has gotten out of hand, and that is one reason
for record gas prices.
As I have said, curbing excessive speculation is not the solution
to our energy crisis, but it is one step, an important step, that we
can take now to lower prices and ease the burden of this crisis for
the American people.
So, Mr. Chairman, I hope that our Republican colleagues will
support our efforts. Part of the package that they introduced a
week or 2 ago to solve the energy problems or to take a bite out
of the energy problems of this country was legislation dealing with
speculation. If my Republican colleagues do not like our speculation
bill, let us hear from them how they want it changed. We will be
happy to work with them.
Speculation is, I repeat, a problem. It is a significant problem
and we must address this. I would hope that if we can get a handle
on this speculation issue by legislating, it will allow us to do other
things.

12
I have spoken to both Senator McConnell and Senator Kyl, saying let us find out what we can do on this. Let us determine what
amendments you want to offer and we want to offer and let us see
if we can work something out.
But I say to all my friends and anyone within the sound of my
voice, speculation is where we should start. There are other places
we can go and we are happy to take a look at that perhaps at some
time, but let us first look at speculation.
I repeat for the third time here today, speculation is part of the
problem that we have got to address. We have to start someplace.
There is no one shop that we can go to and solve all the problems.
There is no one area of the law that needs to be changed that
solves all the problems.
So I think that this workshop is an area where people can bring
their ideas. If Republicans have other ideas, if Democrats have
other ideas, we are all ears. Let us find out what we can do. So
I appreciate very much you and Senator Domenici taking time to
listen to all Senators. This is open to everybody, not only members
of the committee. So I look forward to a productive workshop and
a good bipartisan effort to find solutions for the American people.
If I could be excused, I would appreciate it very much, Mr. Chairman.
The CHAIRMAN. Thank you very much for being here and making
a statement. Senator Domenici had one comment, and then we will
go to questions.
Senator DOMENICI. Mr. Chairman, before the distinguished
Democratic leader leavesand I understand he must leaveI
would like to just comment to him so we do not have to be doing
all of this with the media. We can do it between ourselves.
Look, as one Senator who is somewhat in the leadership position
on the Republican side, we are willing to look at speculation. We
just want to make sure that our leader, you, understand that we
think there are production issues involved, that the American people rightfully want us to produce more energy if we can. I just want
you to know that we may very well work hard with you on the
speculation issue. We may not come to a conclusion, but we are
sure going to work at it.
But we expect to bring before the Senate issues that relate to
how we are going to use various Alaskan oil that might come on
soon if we do things right offshore, which has now taken on a new
breath of life which has been in the closet for 27 years. It is rather
abundant. It is not a little, tiny piece of property. It is a big oil and
gas property, and we would like you to know that we very much
want an opportunity to present that. We will work with you in
every way so we will have a chance to present that to you and to
the American people.
My last comment isI do not know. I keep saying maybe the
Democrats and Republicans can work together on something, and
that might be possible. I leave you with that, fully understanding
of the way I used to do business was that way. I wish it could come
back on energy production, and maybe we could come up with
something for our country instead of for our parties or for ourselves.

13
Thank you very much for the way you are handling things, and
just know that there are a lot of Republican Senators who want to
get something done and want to work in a positive way to get that
done.
Thank you, Mr. Chairman.
Senator REID. Mr. Chairman, if I could just respond to my dear
friend, Senator Domenici.
The CHAIRMAN. Yes, go right ahead.
Senator REID. There is no stronger advocate anyplace in the Senate than Senator Bingaman for increasing domestic production. He
has given a series of speeches the last couple weeks that have
been, I think, really dramatically sound. So we look forward to
you know, it may even be that you have one alternative, to increase
domestic production. We have another. But that does not mean
that they are mutually exclusive. We can work together.
My only point is that no matter what area we start in regard to
doing something about the energy crisis, we have to start someplace. I chose speculation because I think it is a real problem. That
does not mean that we cannot, on this piece of legislation, work on
other issues. I have given Senator Bingaman the charge to come
up with things that he believes, in keeping with what the country
needs to increase domestic production and conserve and increase
efficiency by maybe spending some money on new battery research.
So we are speaking from the same hymnbook, but what we have
to do is get on the same page or two so we work together.
I repeat I would hope that we can have this speculation bill as
the beginning to do something for the American people to let them
know that we are focused on the economy. The economy has had
a number of hits, not the least of which is energy, but not the least
of which is housing. We have those two issues that we are going
to try to make some progress on.
So I appreciate the spirit of Senator Domenicis statement, and
I look forward to working with him and all of his 48 colleagues.
The CHAIRMAN. Thank you very much again for being here.
Let me just start with a question. Dr. Yergin, let me ask you.
You made a reference that you thought there may be 600,000 or
700,000 barrels of oil that could be saved through increased efficiency, as I understood it. Could you maybe elaborate a little bit
as to what you are referring to there? There has been a reduction
in usage by Americans faced with high prices. You are saying that
there are other things that we could do to encourage even more efficiency without doing any damage to the economy.
Mr. YERGIN. Yes. You know, it is the things that we always hear
that are sort of in our left ear as the tips about driving, but if you
just look at the research people have done about three things, cold
starts, tires, lead foot on driving, and you add up those numbers,
you are talking 600,000700,000 barrels a day. That is not depriving anybody of anything.
But I think there is a woeful lack of knowledge, and in fact, communicating that knowledge is not an expensive or difficult thing to
do. It affects everybodys behavior. So we could be talking about 6
or 7 percent of gasoline consumption.

14
The CHAIRMAN. So you are basically suggesting some kind of just
public information campaign to raise peoples awareness of the concrete steps they can take. Is that what you are saying?
Mr. YERGIN. Yes. I was struck in your remarks yesterday commenting that given all that is happening with this, how little effort
there has actually been in terms of that kind of communication.
Yet, of course, what individuals do really adds up because that is
what energy consumption is. It is not dramatic. It is not building
something. It does not take a long time to happen. But I think you
can do that, and those kind of changes do not impose any burden
except making sure we all check our tires.
The CHAIRMAN. Senator Domenici, did you have questions of the
witnesses?
Senator DOMENICI. Yes, I have one.
First of all, I want to say the idea of promoting conservation with
the American people is an excellent one, and I think you have testifiedyou did, Dr. Yerginthat something is bringing conservation
to the mind and hearts of the American people, and we are beginning to use less. I believe that is straight, pure cost. I think cost
is having an impact on the American people and they are using
less. But we maybe should do more at the executive branch and
otherwise.
I think Senator Bingaman has been constantly an advocate of
this, and I think it is happening, according to the numbers we are
getting.
I would like to ask both of you. I have heard both of you testify
that the root cause of high prices is the supply and demand imbalance. I heard Dr. Diwan express it in a very different way based
on specifics that changed, and I laud him for that and thank him
for helping us in that regard.
But let me just say if that is the problemthe root cause of high
prices is supply and demand imbalancewhat can we do as policymakers to address this in your judgment. There are lots of things
being discussed. Some have value, obviously. Some do not. Could
you tell us what we ought to do in your opinion as policymakers
now?
Mr. DIWAN. I mean, this is a tight market and it took 20 years
to get there. I think it is going to take a long time to unwind it.
I spent most of my career looking at supply and demand numbers, and I have trouble to see the U.S. as an island removed from
the world. So for me, globally how do you make sure that supply
meets demand and how do you increase supply over a number
years and how do you make sure that demand responds to prices?
Because in a number of areas, prices are subsidized so that you do
not have a response.
It is very difficult for me to say if you move one piece of the puzzle, it is going to change the whole puzzle. How do you provide
more access to the most prolific petroleum basin? It is actually
probably the biggest thing which will matter in the long term. How
do you have access to basically 80 percent of the reserve in the
world, which are inaccessible to oil and gas companies, which belongs to national oil companies? The investment profile of these basins depend very much on State budgets. That is probably the bigger problem that you are facing.

15
The second one is service sector capacity. Even if you open up
more land or more water for exploration and production, it is not
clear that we have what it takes right now to be able to go drill,
explore, produce more. This industry has under-invested for over
20 years. We got lulled by low oil prices. We liked them. They
pushed a certain behavior in terms of consumption and supply. Basically we have shrunk this industry quite dramatically in terms of
people and capacity and logistics to expand again.
So what we are looking at here is a super cycle for investments,
and for that, you really need the signal of the market of high oil
prices to bring back petroleum engineers. I mean, we do not train
a lot of petroleum engineers anymore.
So it is a very big problem, and I have trouble to believe that you
just move one element, it changes completely the puzzle.
Mr. YERGIN. I think there are lots of pieces in this puzzle. I think
some of the things are in the realm of our relations with other nations in terms of access, encouraging steady development, encouraging a stable investment environment.
I think clearly in this country, as per this discussion, we are having a debate about what is possible with outer continental shelf. I
think we need to look at it, by the way, not only in terms of oil
but in terms of natural gas because I suspect this winter you may
be as concerned with what has happened with natural gas prices
as you are with gasoline right now and with electric prices as a result of that. So our supply position for natural gas really will have
to be part of that picture too, and that also fits into the discussion
about opening up areas in this country.
But it is a global question about access. I think it is a question
aboutI think the way Mr. Diwan expressed it that all news is interpreted in a certain way. There needs to be a sense that, yes,
there is new supply coming on. For instance, I come back again to
Brazil, which could be, some people say as big5 years ago or 6
years ago, nobody really thought there was this huge supply off of
Brazil. Now people at least are saying this could be as big as the
North Sea. Cumulative things like that start to change expectations, and if that happens, that would happen beforeactually that
oil is going to take some years to flow. So it is about what one anticipates for the future, as well as where we are now.
Senator DOMENICI. Thank you.
The CHAIRMAN. Senator Dorgan has to leave to chair another
hearing. So let me call on him first. Then we will take the list of
folks in the order they came and just see if any others have questions or comments or whatever.
Senator DORGAN. Mr. Chairman, thank you. I have to chair a
hearing at 10 oclock, and I apologize to have to leave.
But I thank both of the folks who have joined us today, obviously
experts and people who know a lot about these issues.
I think it is important that we not talk past each other on this
committee or in the Congress. There is a danger of doing that. It
seems to me that it is a false choice for anyone to suggest that
doing one thing necessarily excludes doing another thing. I happen
to think we have to everything. I think speculation is a big problem, but I think we have to do production. We have to do conservation. I would probably even measure conservation slightly ahead of

16
production in terms of the cheapest oil that is available through
conservation. Conservation, efficiency, production, renewables. We
need to do all of that.
But I want to ask about speculation, if I might, for the moment.
Mr. Yergin, you indicated that you did a modeling recently, a year
and a halfor was it 2 years agoon $150 a barrel oil. What was
the date on that?
Mr. YERGIN. That would have been September 2006.
Senator DORGAN. So slightly less than 2 years ago. I think you
said although you modeled $150 a barrel oil, you felt at that point
probably almost a zero possibility or a zero probability.
Mr. YERGIN. Yes. It was ironic because in fact when we do these
scenarios, we do not put probabilities on it. But I was going to say
it was not the thing that people just said, oh, yes, that is exactly
what is going to happen.
Senator DORGAN. Right. But I think you said almost a zero probability, and I think most people would have believed that back
then.
So then the question is what has happened in the last 18 months
that went from a zero probability for an expert to actual $140
some a barrel oil.
Mr. Diwan says that the people in this futures market affecting
price, over two-thirds of them73 percent I think you suggestare
what we call speculators, you said what you call investors. But
nonetheless, they are people who are not hedging a physical product between consumers and producers of a physical product hedging risk. They are in this market because they view this as simply
a new asset class. They have no interest in owning oil.
So I guess the question I have is this. What has happened in the
supply and demand fundamentals or expectationsbecause Senator Domenici said that both of you said thatI am not sure that
you both said thisbut the root cause is supply and demand imbalance. If that is the case, then what has happened in supply and
demand expectations or changes in the last 18 months that would
justify the doubling, more than doubling, of the price of oil in the
18 months if it is not in some significant part attributable to speculation by those in the market that are not engaged in hedging a
physical product?
Mr. YERGIN. Recently the Dallas Federal Reserve came out with
a study looking at the increase in oil prices between 20032007. I
think they attribute about a third of the increase in the price of
oil to the decline of the dollar.
So one thing that has happened, if you look at when oil prices
were bumping along at about $70$80 a barrel at the time that the
credit crisis began exactly a year ago. That is a point when you
look at not only oil. Most all commodity prices really took off. So
one thing that has happened is the decline in the value of the dollar, the loss of confidence in U.S. financial markets, loss of confidence in debt. So I think that is one big thing that has happened.
A second thing that has happened is that Iran has continued to
make progress. Its centrifuges continue to whirl. I think that the
fear of something happening involving Iranand I think Mr.
Diwan would agreeover the last 2 years has become a more pal-

17
pable factor in the market and people looking at those numbers of
what passes through the Strait of Hormuz.
I think the whole movement of the much greater interest of the
financial markets in oil and other commodities is certainly part of
it.
Then the other thing that has happenedand when we did this
scenario, it was premised on delays and postponements in supply
because of the problems in the supply chain. We have seen no slowing down in the increase of costs in terms of development, and so
this expectation of a shortage period in 20122013 has become
more a part of this sort of shortage psychology that is again, as Mr.
Diwan said, part of the market outlook.
So as we are saying, financial markets are part of a feature in
which these other things are happening at the same time. We have
seen Mexican supply go down. We have seen Venezuelan capacity
go down. Iraqi production has not come back significantly.
One other key factor, in the first half of this decade, the growth
in Russian output more than outpaced the growth in Chinese demand. Russian production now maybe even is in decline slightly.
Senator DORGAN. You have also seen the largest assessment of
recoverable reserves ever measured in the Lower 48 just recently
with the Bakken shale in Montana and North Dakota. I think it
relates to what Mr. Diwan suggested, that the good news does not
register apparently.
But I appreciate your response. I have to go chair the hearing.
But I think that speculation probably plays a much larger role,
probably speculation around the very things you talked about, than
does supply and demand.
The CHAIRMAN. Let me just give a list of the first five folks here
in the order they arrived so that they know they are going to be
called on if they are still around: Senator Conrad first, then Senator Barrasso, then Senator Alexander, then Senator Craig, then
Senator Allard. Why do we not start that way? Senator Conrad,
thanks for being here.
Senator CONRAD. Mr. Chairman, thank you very, very much for
holding this workshop. Thanks too to the ranking member, Senator
Domenici, for doing this. I really think is exactly what we should
be doing, putting a focus on this issue in a bipartisan way so that
we can try to find a solution or a set of solutions that would make
a difference both near-term and longer-term.
I asked my staff yesterday to prepare a list of things that we
have done in the Congress since 2004 trying to deal with what we
all saw as an energy challenge to the country.
In 2004, we provided $5 billion of energy tax incentives, biodiesel
tax credits, ethanol tax credits.
In 2005, we passed the Energy Policy Act of 2005, $14 billion of
tax incentives for energy efficiency and conservation, renewable energy, oil and gas incentives, clean coal projects. We had energy efficiency provisions to provide higher efficiency standards for appliances and commercial equipment.
In 2006, we had the Tax Relief and Health Care Act of 2006, in
which we also opened up part of the Gulf of Mexico, 8 million acres
there, for leasing for oil and gas.

18
Then in 2007, we had the Energy Independence and Security Act
providing, for the first time in over 20 years, an increase in fuel
efficiency standards for the automobile and truck fleet, a dramatic
expansion of the renewable fuel standard from 9 billion gallons to
36 billion, with 21 billion to come from cellulosic. Again, we went
back to energy efficiency, new energy efficiency standards for appliances and lighting, greater energy efficiency requirements on Federal and commercial buildings, carbon capture incentives.
Then this year, the farm bill with over $1 billion dedicated to energy, trying to reduce our dependence on foreign oil, including a
dramatic increase in research on cellulosic, which I think most of
us understand is going to be critically important because cornbased ethanol has its limits.
I say this by way of a preface that there have been a whole series
of actions, many of them that do not take effect immediately. Perhaps the only thing that takes effect immediately is, to the extent
speculation is involved here, steps to address that. But clearly, we
do not have just a short-term problem, and speculation alone will
not solve this matter. There is the issue of supply and demand and
the long-term perceptions, as the two of you have described.
My question to you would be this. If you had it in your power
to design a plan to get results to reduce our dependence on foreign
oil, to reduce this dramatic run-up in prices which threatens the
economy, what would you do?
Dr. Yergin.
Mr. YERGIN. You have quite a list there that you have already
established.
I think I would want to look more on the demand side in terms
of efficiency beyond what you have had. I think on the list, you had
clearly one of the most important things was the fuel efficiency
standards and the impact that they can have.
About 10 years ago, I headed a task force at the Department of
Energy on energy research and development, and at that point,
there was not much interest in the subject. I have often thought
if the kind of effort had been started then, we would not be in the
kind of situation we are now.
So without going into the specifics, the other thing is a longterm, consistent program of research and development across the
energy spectrum. It does not bring results tomorrow, but that is
what we need to diversify our energy mix and to build much more
resilience into the system than we have today.
Senator CONRAD. On the production side?
Mr. YERGIN. I think that the issue you all are debating about
what do you do about the outer continental shelf, that other 85 percent, and in an environmentally sound way opening upI guess
the starting point there isas I understand, the money was appropriated to do a seismic survey but not conducted? I mean, the first
thing would be to understand what kind of resource base we have.
The CHAIRMAN. In fairness, I do not think money was appropriated. I do not think it was requested. So it was authorized and
we directed in the 2005 bill that the 3D seismic survey be done,
but there was never any follow-up by the Administration or the
Congress to get that done.

19
Mr. YERGIN. So the knowledge base in a sense is the starting
point to know where the real leverage points are in terms of impact.
Senator CONRAD. As I hear you say it, you would be working all
sides of this equation. You would be working on speculation. You
would be working on production. You would be working on conservation. You would do something in all of those areas.
Mr. YERGIN. Yes, exactly. I go back to the fact that we have a
$14 trillion economy, and it does not just rest on one leg to do it.
I think we need further clarification. As I said in my remarks,
we use the word speculation, and it is not clear often what that
means. Clearly, the financial markets have a much bigger role than
they did 3 or 4 years ago in this, as in other commodity markets.
Will it turn out to be a bubble, as we have seen in other markets,
or not?
I think that the problem with the energy market, unlike, let us
say, even housing or the Internetthose are not affected by geopolitical forces. You have this whole geopolitical uncertainty that
hangs over the energy market specifically.
Senator CONRAD. Would you do something about the value of the
dollar as well since both of you have identified the weak dollar as
a key reason for the run-up in prices?
Mr. YERGIN. That is outside. I think that is outside the realm of
energy policy, and I think you have the chairman of the
Senator CONRAD. Yes. We have got to connect the dots.
Mr. YERGIN. Yes. But I think that we should recognize, if you
look at all the commodities, the weakness of the dollar. If you go
outside the United States, the significance of the weakness of the
dollar and the flightnormally during times of instability, you
have a flight dollar. In terms of currency instability, we have this
flight commodity going on right now. So in principle, we have other
problems in the country, but a stronger dollar I think would actually be a factor that would help ameliorate
Senator CONRAD. Mr. Diwan, what would you do?
Mr. DIWAN. When I look at the energy policy of the United
StatesI am a European. So I am taking a slightly different perspective. In a way what we have done here in the last 25 years,
we encouraged consumption and we discouraged production. We
need to fix both things in a way.
We have allowed cars to become very large and very inefficient.
We have not done much about it. I agree with Dr. Yergin that probably the most important element of legislation over the past few
years was the CAFE standards. But think about it. We talk a lot
about new technology and R&D, et cetera. But the average car efficiency in the United States right now is half of what it is in Europe. So we can talk about new technologies, but there is plenty of
available technologies to get more efficient. So that is the largest
problem.
I mean, the United States consumes close to 50 percent of world
gasoline. Those are a little bit scary numbers here.
So we have allowed people to drive bigger cars further out in the
suburbs, and we are paying the price. So we can say it is speculators, it is oil companies, it is this and that. At the end of the day,
it is us. We need to be honest about it. I know it is difficult to say

20
it is us. It is easier to say it is them, whoever they are, speculators,
OPEC, et cetera. But we have done that to ourselves. So we need
to look there. So I think it is both consumption and production in
that sense.
But that will take a long time. I mean, you have incredible infrastructure in this country. You have enormous installed capital, and
to churn that capital to more efficient capital will take 10, 15, 20
years.
So the question is what can we do in the short term, and the
only thing we can do in the short term is try to do little things.
I mean, look at the commodity laws and see how we got where we
are and look at what I would call the investors, not the speculators,
look at the little things we can do to improve the efficiency of the
cars in the short term. Dr. Yergin talked about inflating tires. I
think it is difficult to ask 300 million people to do it, but we need
to encourage those kind of things.
So there is a lot to be done, but at the end of the day, we got
our priority wrong in the last 25 years and we need to fix that.
The CHAIRMAN. On our list here, I think several of the folks who
I read off before are no longer here. Senator Barrasso is not here.
Senator Alexander is not here. Oh, Senator Alexander is here.
Senator ALEXANDER. You can let someone else go ahead.
The CHAIRMAN. I think the next one here would be Senator Allard since Senator Craig left. So Senator Allard, go ahead.
Senator ALLARD. Thank you, Mr. Chairman and thank you for
holding thisI guess you are not calling it a hearing, but discussion of what has actually been happening as far as the energy markets. I think you do bring in some interesting perspectives and
whatnot.
I would follow up with what Senator Conrad was approaching.
Many times we are faced with an argument of more independence
as far as the United States is concerned, less dependence on foreign
sources of energy. If we are trying to become more dependent on
just our own sources of energy and whatnot, you talked about conservation, but on the supply side, what can we do?
One of the arguments that struck me is that we are the only
country, for example, that limits offshore drilling. I do not know
whether that is correct or not or whether you agree with that statement. But do we do that as compared to other countries? How does
our controlling supply maybe differ from what other countries are
doing?
Mr. YERGIN. Let me say, first of all, I think we import on a net
basis about 58 percent of our oil and about 25 percent of our total
energy. Of course, our two major sources of oiltwo out of three
are our neighbors, Canada and Mexico. So it is kind of keeping that
framework.
So are we going to become energy independent or are we really
going to focus on our energy security and resilience of our system?
I think that is really where we ought to be.
I think on the offshore, I was looking last week at a survey that
said that Norway is the second greenest country in the world in
terms of environmental policies. They produce about 3 million barrels a day entirely offshore in the North Sea in a pretty harsh environment. I think one question might be, how do the Norwegians

21
manage this? I mean, if we want to see how other people are doing
it. I think in this survey, the U.S. was ranked number 31 in terms
of environmental countries. So I think there are messages there in
terms of how other countries handle it.
Of course, we have that very large energy complex in the Gulf
of Mexico and then off Alaska. I mean, 27 percent of our oil now
comes from the offshore. So it is not like we have not done it before.
Mr. DIWAN. I have a problem with the concept of being energy
independent. After all, we are dependent for everything else. This
is an open world. Even if the United States produced 95 percent
of its oil, if something happened in Venezuela or Nigeria or Iran,
oil prices will increase here. Really it is a price impact. So no matter what happens anywhere else in the world, it is the butterfly effect. It will have a price impact in the United States. So at the end
of the day, we are linked globally to everybody else who consumes
and produces oil, and that is what is important.
On the issue of producing more and in the offshoreand I agree
with Dr. Yergin herewe can impose very tough environmental
standards and look at what the industry can do. I agree that some
countries have much tougher standards and have been able to
produce with very little spill or risk of spill over time. So we can
do things.
A broader question here is, how do you fix a policy to both encourage production and consumption at the same time?
Senator ALLARD. Many States in the West have a lot of public
lands. Do you have any figures on the amount of known reserves
that we have in public lands and any idea of what perhaps projected possible reserves might be on public lands?
Mr. YERGIN. I do not. The only thing I would say is that reserves
is not a static concept. We have seen that technology changes and
areas that were thought to be in decline or finished, in the Rockies,
for instance, turn out to be significant producers, or we see unconventional natural gas. So technology itself expands the resource
base. But I do not know what the current estimates are for the
West.
Mr. DIWAN. Nor myself. I do not have a number.
The CHAIRMAN. Yes, we can sure get all that information for you.
Senator ALLARD. I appreciate that very much, Mr. Chairman.
That concludes my questions.
The CHAIRMAN. Senator Salazar.
Senator SALAZAR. Thank you very much, Chairman Bingaman.
I think over the last 3 and a half years on this committee, we
have done some good things around energy. I think the three pieces
of legislation we passed in 2005, 2006, and 2007 were good. The
question now is what more we ought to do, especially given the
pain that the people of America are feeling with high gas prices.
I think there is broad agreement on conservation, I think on alternative fuels, alternative energy, I think broad agreement on new
technologies, hybrid plug-ins, battery technologies, et cetera. But
the big debate I think that will take shape here in the next week
or 2 will be about additional supplies, putting more oil into the
pipelines.

22
My question to you, Dr. Yergin and Mr. Diwan, has to do with
what those additional supply sources might do with respect to the
high gas and diesel and jet fuel prices that we are paying in America today. I want to be specific.
First of all, with respect to existing leases, there is a number out
there that there is some 68 million acres of public lands that have
already been leased, much of which is not in production. Is there
anything that can be done to put those into production? What
would be the impact in terms of energy prices?
Second of all, the Alaska petroleum reserve. The Alaska petroleum reserve is there, proven reserves. Why can that not be put
onto the market, and what would happen if the Alaska petroleum
reserve did come on?
Third of all, offshore. If we looked at the areas that do not have
a moratorium in places off Alaska, if we were to push for those
areas to be opened up, what impact would that have in terms of
our energy prices?
So maybe if you can just answer that last question, in terms of
additional supplies where I think there might be agreement in
terms of us moving forward and trying to push our production from
those areas.
Mr. YERGIN. Of course, the offshore areas are the ones with the
longest lead time. So in terms of physical oil coming on, if you start
it today, there are several years. There is the question of the sense
of expectations of new supplies coming on, and I think ultimately
we have seen it in the last 2 days I think. We have seen the price
drop rather substantially. Who knows what will happen today?
But it goes back to what Mr. Diwan is saying. When there is a
kind of cumulative shift in the emphasis that from there is going
to be a shortage to, in fact, that new supplies, new areas are going
to open upand, by the way, the expectations that people have,
the pictures of demand from 2 years ago is no longer appropriate
after these type of prices. Oil is not going to retain its monopoly
position in transportation. You mentioned hybrids and so forth. We
have mentioned biofuels. Oil will probably have the predominant
role. That kind of shift, at some point, is what starts to bring the
prices down. Maybe we are starting to see the demand responses
specifically that will also reinforce that.
Senator SALAZAR. Let me push you just a little bit on that question. When I look at information that we have on the Alaskan OCS
that is not covered by the moratoria, the number that I have is
that there are 918 million acres that are available out there. I
think the numbers from the Minerals Management Service indicate
1.2 billion barrels of oil in that area, 17.8 trillion cubic feet of natural gas.
If there was a major push to go into an area of that size, what
impact would it ultimately have on energy prices here in the U.S.?
Would there be an immediate impact? Would it be a lag impact?
What kind of impact would it have?
Mr. YERGIN. I mean, it certainly would not have immediate impact in terms of supply because it would be a 5-, 6-, 7-year development program. I think if the sense thatand in other areasyou
start to have a sense that new supply is coming on, that then
changes the kind of expectations that are driving the market.

23
I think that each of the companiesthe reason they bidsometimes several companies will bid for a lease and sometimes no one
will bid for it, and sometimes one person will bidis because different companies will look at the geological potential. It is fairly
you know, we use the word speculative, but speculative in a different way because you really do not know until you actually start
serious exploration. So there is a lead time.
Senator SALAZAR. I recognize the lead time because you make
these lands available and it takes time to do the exploration and
to do the quantification and do the development that it is going to
take. But just making them available and getting on a program to
actually get those leased, would that have an impact on price?
Mr. YERGIN. Yes. I think, if I understand your question, that the
sense of new prospective territories being available and moving toward serious exploration I think would be one contribution to the
mosaic of expectations.
Senator SALAZAR. Thank you.
I know my time is up. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you.
Senator Alexander.
Senator ALEXANDER. Thank you very much for really helpful testimony. I am sorry I missed the last 30 minutes.
But I would like to go back to an understanding of this. Do I understand each of you to say that todays price for oil depends to a
large extent upon the expected future supply and future demand
of oil? Is that correct? How can I say that more accurately?
Mr. YERGIN. Yes.
Senator ALEXANDER. Because a lot of people say that this might
take 5 years, and I think what I hear you saying is if we see a shift
in demand, such as with plug-in hybrid electric cars, if this country, using 25 percent of all the oil in the world, suddenly got on
a clear track toward electrifying a large portion of the cars and
trucks, that that expectation from the future would affect todays
oil price. Is that correct or wrong?
Mr. YERGIN. Yes. I want to make clearand I think both of us
agree with thisyou have to start from where we are today. We
have a tight supply/demand balance. We only have about 2 million
barrels a day. If something bad happens somewhere in the world
and we lost a million barrels a day, that would have an immediate
negative impact on the market. Part of what is in the market is
the recognition that there is not much margin for error.
On top of that, however, expectations todayI think we are both
sayinghave a larger impact on price than it might have at other
periods because there is this sort of drum beat that in 2012, 2013,
there is going to be a physical shortage of oil in the world. I find
that widely believed when you talk to kind of a cross section of people who follow these things.
Mr. DIWAN. I will add one thing which is important in the psychology of if you provide more land, they might believe that the
supply is going to increase and they stop putting in the expectation. You are going to have to do a lot to change the expectations
because the problem is not only the access, but it is really the ability to go explore, build the facilities, and produce. The bottleneck
in the service sector is such that even if you are putting more land

24
and good land, which might have potential reserves, the skepticism
vis-a-vis the ability to produce that in the next 5 to 7 years is very
big.
I mean, think about the large fields which are coming on line
right now in the world in Angola and Nigeria and the Gulf of Mexico and Brazil, et cetera. All of these fields are 4 to 5 years late,
behind schedule. On average, they are 4 years behind schedule. All
these fields werebasically we stopped working on them in the
mid-1990s. So we have been waiting for a long time for that oil to
come. That has really permeated the market. If an oil company
tells you it is coming in 6 years, it is really coming in 10 years,
maybe. The fact that often these fields coming on line are smaller
than what they thought they would be.
So the psychology has been really impacted by what happened
over the last 5 years, all those delays and the incredible length of
time it took to develop these deep offshore fields.
Senator ALEXANDER. But you are still saying that todays price
depends upon the expected future supply and demand. Is that
right? In part. A big part, small part?
Mr. YERGIN. I think that in this very tight market, these expectations loom larger than they would have maybe a few years ago.
There is much more focus on this mid-term notion. You know, I
would say there are four things. There is a tight supply and demand. There is Iran and these mid-term expectations about supply
and China and demand growth. I think those are the kind of starting points that are shaping the psychology of price today.
Mr. DIWAN. One thing which is remarkable, if you look at the
price growth, so if you look at oil prices 2, 3, 5, 10, 12 years away,
they are very close to todays price. So the market is having difficulties to understand all of that. We have a very flat curve in
terms of oil prices. We do not have a very big shift in expectations
which are reflected in the price curve. So the market is basically
taking todays balance and the expectation in the future that not
much is happening and pricing oil in the very long term.
Senator ALEXANDER. You mean locking in todays price at a future time.
Mr. DIWAN. Correct. I mean, if todays price is $135, prices 10
years from now on the futures exchanges are probably $137, which
does not make a lot of sense in many ways because you would have
very different expectation of
Senator ALEXANDER. May I ask one other question? Have either
of you made projections? I mean, there is talk about oil as a bridge
to a future when we have a different kind of energy. As policymakers, how should we think abouthow much oil is the United
States going to need 10 years from now, 20 years from now, 30
years from now or as we move to a different kind of energy future?
Have you done projections of that kind?
Mr. YERGIN. I do not think so.
Senator ALEXANDER. Did you, sir?
Mr. DIWAN. I mean, the difficulty here is price is the most important function. Depending on prices, your projection will be very different. So if you believe it is going to be $140 oil going forward,
I think you will see a big destruction of demand and a faster shift
to other energies. If you had $20 oil, you can be sure that we would

25
have a very steep forecast and demand increase. So price is what
killed the price at the end of the day.
Senator ALEXANDER. Did you say while I was out of the room
you said that 27 percent of the activity of the buyers and sellers
of oil today are financial peopleor 27 percent are the people who
actually take physical possession of the oil. Is that what you said?
Mr. DIWAN. Yes. The latest CFTC data, which really break it
down, which is April I think, shows that between 27 and 29 percent of the market is commercial.
Senator ALEXANDER. The rest are financial people.
Mr. DIWAN. Yes, different type of commercial
Senator ALEXANDER. Did you say what you thought we should do
about that, if anything?
Mr. DIWAN. What I said is what we have done is we have closed
the door and at one point we opened the window. Perhaps it is time
to close the window and make sure that all the players in the commodity market abide by the same rule of position limits.
The CHAIRMAN. All right. Let me just go through the list so everyone knows. Some of the folks who were here earlier who I do
not think are here now, Senator Barrasso, Senator Craig, Senator
Voinovich, Senator Cantwell, Senator Chambliss, Senator Bennett.
So the next who is here is Senator Corker.
Senator CORKER. Thank you, Mr. Chairman. As others have said,
I think this has been most enlightening and I certainly appreciate
the efforts of you and Senator Conrad and Chambliss and others
to try to solve this problem.
I have only been in this body for about 19 months and continue
to be amazed at the way that we look at things here. I mean, we
have had two experts and many others ad nauseam who tell us
that the law of supply and demand continues to work in the year
2008, which is an amazing thing. It has worked for so long before.
Yet, we began to talk about energy legislation instead of focusing
on supply and demand issues. I appreciate so much your focus on
conservation and lessening of demand. Where do we begin that discussion but with speculation, which is a symptom of the fact that
we do not have the courage or ability in this country to do the
tough lifting of supply and demand? So we want to do the easy
things first, probably the wrong things first.
I just find it amazing that the majority leader of the Senate was
in here in this body earlier and was talking about what a great
thing this was to have this summit but did not hear a single thing
that was being said, and that is it is supply and demand. So we
start way off here in another place. I can understand why this body
has a 9 percent approval rating because we do not address the
issues as they really are.
Now, I will say this. Since it looks like we are going to talk about
speculationI do not have control of the agenda. Nobody here does
other than the person who just left.
I would like to understand what we mean about closing the window. It seems to me that what we ought to be concerned about in
this country is if somebody is manipulating the market. I mean, at
the end of the day, if there is ocean-front property and there is only
so much of it, then it seems like the price is going to go up, and
it seems like that we understand that. If there is not going to be

26
additional supply and it is going to be bullish and we are not going
to have hurricanes and things, that that is going to continue to go.
So I guess I have a hard time understanding why we would be
concerned about investors in the market. It seems like what we
would be concerned about is manipulators in the market, and it
seems like to manipulate, you would have to hoard supply somehow, hoard the product. But I would love for you, if you would, to
expand just a little bit because I think we ought to try to do the
right things and not try to find a bogeyman, if you will, to sort of
pen off politically and make the American people think we are actually doing something when we are not. So if you could expand on
that and help us, that would be great.
Mr. DIWAN. Yes. I do not think there is a bogeyman here.
What I am trying to say is basically all the commodity exchanges
in general had allowed two types of players on them: what we call
the commercials, people who buy and physically need oil, sell it or
buy it; and the non-commercial, which are the speculators, if you
want. The idea is we need the speculators to provide liquidity to
the market.
In this market, we have traditionally set the position limit, how
much each speculator by himself can holdyou know, what number of contracts they can hold. In oil it is 3 million barrels. So we
had that legislation for very long.
But we have allowed at one point in 1999 that index funds do
not abide by that position limit. This is what I have called the window, if you want. So suddenly you have a new type of players
which never bought and sold oil like university endowments and
pension funds globally, not only in the U.S., to basically use oil as
a financial asset, not as a physical commodity.
We can reimpose that position limit so they would have to abide
like the other speculators. I mean, hedge funds, for example, have
to abide by that limit, but if you are buying through the index
fund, you can basically go beyond your limit. So that is the one
problem.
Senator CORKER. So that is a problem. So tell us specifically because we do really bad things here. Tell us how we solve that problem.
Mr. DIWAN. We do not know how big of a problem it is because
we do not know if we have 500 pension funds which each of them
actually is below the position limit or we have 20 of them which
have massive positions. We do not know that.
Senator CORKER. OK. Let me ask you this. In solving a problem,
it seems the first thing we would want to do is to know the answer
to the question or we would want to know how many people are
doing it. Is that correct?
So let me just ask, would it not be wise for us to invest in staffing and ensuring that we have transparency and understanding
the dynamics of the issue before we try to solve it? I would just ask
you that question.
Mr. DIWAN. Sure. I think we need a lot more transparency and
the data has been poor to dismal. This is right now probably one
of the most important parts of the oil price formation, and we have
very little ability to understand because the data provided by the

27
regulator, CFTC, is inadequate. If you had a lot more data and
transparency, we would be able to do a lot more analysis.
But there is also an issue of do we need every single player to
disclose publicly the data or the regulator by itself will have to look
at these positions. What we know is basically that position limits
do not apply if you come through one side of the market. That is
what we know. We know that that section of the market right now,
these swap dealers, if you want, represent the largest section of the
market and they have grown very, very fast. Actually it is the only
real increase in the open interest. It is coming from these players.
So the money is coming in quite fast through that instrument, the
index funds.
Traditionally what speculators are bringing to the market is liquidity. They are buying and selling. The problem with the index
fund, they only come on one side. They only buy long. They never
are short. They are not allowed to. Quite often it is like a parking
lot. They are here to park money. So in a way they are drawing
liquidity away from the market.
Senator CORKER. Since we typically do not address the issues
head on, if we were going to try to address this specific issue that
you know more about than anybody on this panel, how would we
do that?
Mr. DIWAN. You reimpose position limits for all players. So if you
are coming through an index fund or you are coming directly to the
market, the amount of oil that you can hold is the same as any
other players.
Senator CORKER. Now, how do you impose position limits when
this is done over the counter and there are not mechanisms in
place to know what those limits are?
Mr. DIWAN. Those are in the future markets. The brokers, if you
want, hedge these positions on the market. The exchanges regulate
already the position limits of all the other actors. So they need the
brokers to disclose data so they can regulate that.
Senator CORKER. So does something have to happen first for us
to be able to do what it is you are suggesting?
Mr. DIWAN. We need to ask the regulator to regulate that aspect
and to impose a position limit.
Senator CORKER. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Murkowski.
Senator MURKOWSKI. Thank you, Mr. Chairman.
Gentlemen, thank you for your comments this morning. I think
we have heard someI do not knowI would call them the hard
truths when you remind us that our policy in this Nation has really
been to encourage consumption and to discourage investment. That
is really a very big contributor to where we are today and why we
are facing the prices that we are facing. Sometimes I think we hate
to admit that it is us. We are looking for somebody to point the finger at when, in fact, we are part of the problem. I think that is
sometimes a difficult reality. So I appreciate your reminding us of
it.
I also appreciate the comments about recognizing that it is not
just about providing the access. When it comes to the supply side,
we can go ahead and we can make more acreage available for leasing, but as we know full well up in Alaska, you can make that

28
available but you might not see a return on that ever or it may be
10, 15, 20 years down the road.
Shell put up over $2 billion in leasing. They have been held up
because of litigation for two seasons now, and they are going to
come back and try again next year. But our reality is that there
are other impediments out there, and just suggesting that we can
make more availableyesterdays news back home was that Interior has put up millions of additional acreage in the NPRA, and
that is good. But that is not new news. That plan was released in
May, but it was not as exciting an issue back in May because we
were not looking at the prices in May that we are today. So I appreciate the perspective on that.
What I wanted to ask aboutand, Mr. Diwan, you mentioned it,
I think, in talking about the supply/demand imbalance and the access to some 80 percent of the world supply. We know that right
now what we are seeing is the direction that so many nations are
taking in terms of nationalizing their oil assets and acting in their
national interest as opposed to a global interest. We are talking
about how much does market speculation increase the price. Do we
have any idea how much this nationalization trend is influencing
our prices?
Mr. DIWAN. I have been looking at prices for most of my professional life. I have never been able to break it down into this event
has that type of impact and this event has that type of impact. I
do not think I can. I do not know if you have looked at it differently.
Mr. YERGIN. As Mr. Diwan says, I do not know how to parse it
specifically, but I can say that one feature of the current period is
that so much money is flowing into the countries that control these
resources. This year we estimated it might be a $2.3 trillion income
transfer from consumers to producers. Those countries do not have
a great sense of urgency about developing resources. They are making more money than they thought they would make. They have to
decide where to put that money. There are lots of claimants domestically for that money. So they say, what is the rush? So it just
takes longer. Decision-making is slower. Things do not get done. So
I think that is one way that kind of nationalism, if you are saying
it, or national control manifests itself. They just do not feel the urgency.
Senator MURKOWSKI. You see the front page of the Washington
Post this morning about what Saudi Arabia is doing with their just
incredible resource wealth in terms of creating a new economic
I do not remember exactly the specifics of it.
But recognizing that trend, I think the comment was made that
one-third of the price increase that we have seen between 2003 and
2007 was attributable to what was going on with the dollar. In the
past decade, we are seeing again this greater trend toward nationalism. I am assuming that it is your opinion that this will continue
as opposed to shifting any other direction, that it is going to continue
Mr. YERGIN. Until the price comes down. Prices at this level
again, it just takes that urgency. So this could be a while before
that trendI am sorry to interrupt.
Senator MURKOWSKI. No. Go ahead.

29
Mr. YERGIN. I was going to say that one areaand this gets into
the area of diplomacyis that the U.S., where it can, ought to be
encouraging countries to be timely and expeditious in their decisionmaking.
Senator MURKOWSKI. When it is in their best interests.
Mr. YERGIN. When it is in their best interests.
Senator MURKOWSKI. Very quickly then and I will turn it over to
my colleagues.
In the short term, is it fair to say that the most immediate thing
we could do to help reduce the prices that people are paying across
the country is on the demand side from a conservation and an efficiency perspective?
Mr. YERGIN. Yes. I think that is because you are talking about
physical barrels being consumed in the world and affecting that
tight margin of supply and demand. Our gasoline market is bigger
than the entire oil market of any other country.
Senator MURKOWSKI. Thank you.
Mr. DIWAN. We are already starting to see that. Gasoline prices
are high because crude oil prices are high, but gasoline per se right
now is not very expensive, I mean, the difference between gasoline
and crude, if you want, the margin. One of the reasons is very simple. Supply has been growing. We are adding gasoline supply into
the market because we have a growth in refining capacity. We have
ethanol, and at the same time, demand is declining. So the gasoline
portion of the price, if you want, is shrinking, but the crude oil
price, which is really the base of the price, has risen dramatically.
Senator MURKOWSKI. Thank you, Mr. Chairman.
Mr. YERGIN. Senator Murkowski, could I just add? Just to reiterate, the reason we are all here today is the urgency of this because it goes back to the basic fact we are in an oil shock and this
is a tremendous burden on our economy and the global economy.
At prices at this level, we are running on a global basis very substantial risks.
The CHAIRMAN. Let me just give the listing of folks that I have
here that are here at the current time: Senator Sessions, Senator
Lincoln, Senator Ben Nelson, Senator Menendez, Senator Isakson,
Senator Whitehouse, Senator Tester.
Jeff, why dont you go ahead?
Senator SESSIONS. Was Senator Nelson ahead of me?
The CHAIRMAN. Were you ahead? I was given a list here that
said that Senator Sessions was here and then Senator Lincoln and
then Senator Nelson.
Senator SESSIONS. I would certainly be pleased to yield my time
to Senator Nelson. I think he was here when I came.
The CHAIRMAN. Why dont we go ahead with you then?
Senator SESSIONS. I think that would be fair and just.
The CHAIRMAN. We will do you. What about Blanche? Was she
here ahead of you too?
Senator SESSIONS. I do not know. I saw her in the hall. She left.
She came back.
The CHAIRMAN. We will go to Senator Nelson. Then we will go
to you.
Senator SESSIONS. Whether she keeps her place or not I do not
know.

30
The CHAIRMAN. Senator Cantwell was here ahead of all of you,
but she stepped out and now she is back. But go ahead, Senator
Nelson.
Senator BEN NELSON. Thank you, Mr. Chairman. I have to say
to my friend from Alabama that he is characteristically gracious
and I appreciate that.
As we think about drilling and the question to drill or not to drill
or where to drill, you mentioned prolific basins or prolific areas. Do
we have currently, with the appraisal that we have which is outdated, enough knowledge to know where the prolific areas are, No.
1?
No. 2, would it even be better, though, to have a new appraisal,
an assessment, a seismic assessment, to be helpful? How long
would that take if we decided to wait or to go forth with a new assessment? Either one of you.
Mr. DIWAN. Globally we know that basically most of the world
reserve goes from northern Iraq to the southern tip of Saudi Arabia
on the east side. I mean, basically probably 70 percent of world reserves are concentrated there.
Senator BEN NELSON. Based on what we know right now.
Mr. DIWAN. Based on what we know right now and on the size
of fields that we discover in the region and what we know of the
previous surveys, for example, in Iraq where you have probably
of the eight largest fields which are not producing in the world, I
think seven of them are in Iraq right now.
So we know, with the existing technology we had over the last
20 years, where these prolific basins are. The United States is fairly well explored, if you want, because we have been allowing the
oil companies to do a lot more work here, and in this country, we
are willing to go get much smaller pockets of reserve than anywhere else in the world because the economics are profitable.
But also we have new technology and sometimes new technology
allows you to discover new reserves. Dr. Yergin was talking about
in Brazil we just discovered the two largest fields of the last 10
years over the last 18 months.
Senator BEN NELSON. We did not know that because we had not
had the experience with that area in terms of seismic appraisal?
Mr. DIWAN. Correct. Yes.
Mr. YERGIN. The technology.
Mr. DIWAN. We did not have the technology. These reserves are
below a layer of salt, and traditionally we have not been able to
do good seismic through salt. So we might have the same in other
places in the world.
Senator BEN NELSON. So it would be good to have another assessment, and would that be true, let us say, of the outer shelf or
the Gulf of Mexico if we are talking about offshore locations?
Mr. DIWAN. Sure. We have exploration in the Gulf of Mexico and
we are discovering a big, new place. We had discovered one 3 years
ago which we have not really yet determined. It takes a long time
to determine. You need to drill into depths that you have never
done before. So you are always on the edge of the technology available at the time.

31
The same in Brazil. What we discoveredanyway, we do not
have yet the technology to produce. It is really at the edge of what
we know.
Senator BEN NELSON. In terms of the leases that the oil companies have todaylet us say in the outer shelf, the Gulf, and on the
continental United Statesare those leases in areas that you
would consider prolific enough for drilling to occur, for production
to occur?
Mr. DIWAN. If you discover oil in the United States in these areas
in any significant quantity
Senator BEN NELSON. What we have today.
Mr. DIWAN. Yes. If you have the option of spending money, you
will spend it first in the United States because you will make more
money on any barrel produced here than anywhere else in the
world. So you have incentives to produce as much as you can in the
United States.
Senator BEN NELSON. Then if that is the case, why is there such
an interest in more leases? Is it that the lease is always greener
on the other side of the fence?
Mr. DIWAN. You want to have as much oil as possible to produce.
The portfolio of the oil companies is fairly thin in reserves, if you
think about it. They have 10 or 15 years only for future production
in their portfolio. It is fairly thin.
Senator BEN NELSON. Even with 68 millionI am not trying to
be argumentative, but even with 68 million acres under lease, that
is not much more than 15 years at best?
Mr. DIWAN. I am pretty sure that a lot of these acres havewe
looked if they are prolific or not, and they are not. I mean, oil companies are going to drill what they know, and if there is oil, they
will drill it. If there is no oil and gas under these leases, there is
nothing to do about it. A lot of it is that. I mean, they are going
to prioritize every year. They have a budget and they are going to
spend as much as possible on these leases when they know there
is oil and gas.
Mr. YERGIN. I think that is the key thing is they prioritize it. If
they spend money to win it, they bid a lease, they are bidding
against other people. They are doing it because they think there
are resources there and then begins a couple of year or several year
process to determine it. Then at the end of the day, they have a
dry hole or they find resources, but it is not economic to develop
or they find productive resources. I think in other parts of the
outer continental shelf, our knowledge is maybe 30 years out of
date because they were last looked at with technology of 30 years
ago.
Senator BEN NELSON. So would that be helpful to have a current
assessment of the outer shelf?
Mr. YERGIN. I think so not only from an oil point of view but also
looking at the degree to which this country has made a bet on natural gas for electric power generation
Senator BEN NELSON. Both oil and gas.
Dr. YERGIN [continuing]. That it is important from a gas point
of view too because either we import the gas and LNG or we
produce it in North America.

32
Senator BEN NELSON. My final question goes to speculation. I
think I heard you say 73 percent or near that number would be
speculators. Everybody is a speculator, but it is speculators that
have no interest in taking delivery. Is that fair?
Mr. DIWAN. Yes.
Senator BEN NELSON. Five years ago, do we know what that percentage was?
Mr. DIWAN. Probably close to 50 percent.
Senator BEN NELSON. Ten years ago, do we know what that percentage might have been?
Mr. DIWAN. I do not have it off my head, but the market was
much, much smaller. The pie has multiplied by six over the last
the last 6 years.
Senator BEN NELSON. How much data do we need to collect to
know that there is a problem? More data probably helps us narrow
down what to do about the problem, but how much more data
would we have to know towhen I say a problem, driving up the
price of a barrel.
Mr. DIWAN. The data has to be a little bit more refined. We need
smaller categories of players rather than these two big categories
of commercial/non-commercial. You want to break these into smaller categories, which the CFTC has started to do.
Senator BEN NELSON. How long will it take us to get that kind
of data?
Mr. DIWAN. The data exist. We need to process it.
Senator BEN NELSON. No. I understand that you would like to
have refinement. We all would. Purely supply and demandor ignoring the fact that so much of it is about future supply and future
demand, that you cannot just say it is as simple as supply and demand. Oversimplistic responses like that are I think what are offending the public. They are sophisticated. They understand that
this is a very complex situation. So those who just say supply and
demand, find more, use less, that is clear that we need to do that,
but it is a lot more challenging than that. Would you agree?
Mr. DIWAN. Yes. It is a very complex puzzle.
Mr. YERGIN. Maybe Mr. Diwan can elaborate on it. You have
such a range of participants in the financial markets. You have
people that you look at them and say those guys are speculators
and then say that those people are 401(k)s who are trying to assetallocate to protect the pensions of people down the road. So I hope
that out of this process we will have some greater clarity as to this
range of people who are the financial market players and some way
to break it down more into categories.
Senator BEN NELSON. I think it was Will Rogers who said about
commodity speculation, when it is pure speculation, that it is people buying something they are never going to get from people who
are never going to have it. But if that is the case and it goes to
hedge funds and pension funds, that is the most challenging part
that we have to deal with right now rather than those people who
are going with forward contracts to lock in prices on something
that they are going to take and something they are going to need.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much.

33
Why dont we go with Senator Sessions, Senator Lincoln, and
then Senator Cantwell? We will fit you back in since you were here
earlier than the others.
Senator SESSIONS. It is basically supply and demand. Is it not,
Dr. Yergin? Is that not what is called the boom and bust in the oil
industry for all these years that you so brilliantly wrote about in
The Prize?
Mr. YERGIN. Thank you. I do think when I kind of finished The
Prize and looked at all those hundreds of charactersand sometimes I think that the two more important characters in the book
areone is named supply and one is named demand.
Senator SESSIONS. Where were the speculators when oil was at
$25 a barrel?
Mr. YERGIN. Roger.
Mr. DIWAN. I think think you did want to play too much in that
market when oil was $25 because you had 5 million per day of
spare capacity in OPEC. If you bought or sold oil, basically you
were betting on OPEC, which was a risky bet. When you removed
that spare capacity from OPEC, suddenly it is supply and demand.
It is not anymore OPEC.
Senator SESSIONS. In other words, when there is a deficiency of
supply as opposed to demand, the speculators can profit, and that
is when they come out and are more visible and more aggressive.
Prices are surging and they attempt to capitalize on that by buying
contracts for delivery of oil. Is that not basically what happens?
Mr. DIWAN. If you think about the oil futures 6 or 7 years ago,
it was small, fairly liquid and fairly contained with few players on
it. You had sometimeshow could I say thatprice moving in a bizarre fashion because it was small, fairly liquid. So some of the bigger players could do things.
In the last 67 years, that market has really mushroomed. It is
a very big, liquid market. So you brought a lot of liquidity from
these financial players. So the whole structure of that market has
changed.
As you did that, you have brought what I call new fundamentals
in it. Supply and demand, you are right. But supply and demand
of dollars really matter here. The perception of inflation really matters.
At the end of the day, it is supply and demand of paper barrels,
and these paper barrelswhat you have right now, you have created a structure where we have a lot of people who want to hold
paper demand. You do not have a lot of people who are willing to
provide paper supply. If you are an oil company and you believe
that oil price is going to increase by $20 or $30 because that money
keeps coming in, you have little incentive to go sell forward your
production. You would be doing a disfavor to your shareholders.
So what we have seen is the commercial players, the ones who
are on the long side who are providing, if you want, the supply on
the paper market, have removed themselves from that market because it was too risky for them. So the futures market has become,
if you want, the sandbox of mostly financial players.
Senator SESSIONS. We could say that because of the shortage and
increasing world demand, unusual forces have come into play. I
would just say I do not have a religious objection to controlling fu-

34
ture speculation. If somebody can come up with a decent idea, I am
willing to consider it. Some have worked on that, but I do not think
that is the fundamental problem.
Mr. Yergin, your bookyou talk about boom and bust. Some say
that the world has changed. We are beyond peak oil and you can
affect the stock market right now today. I will give you that opportunity.
With the price surging to these record highs, consumption has
dropped 3 or so percent already in the United States. Drilling and
rigs are out at record levels today. Historically that has led, after
a period of years, to a collapse in the price. What do you think?
Mr. YERGIN. I do not think today is the day to predict a collapse
in the price of oil.
I do think thatand is it at this level? Is it higher? What I said
before, I mean, I think the question of the Middle East and particularly Iran looms quite large and the uncertainty about that.
But I think in a sense if we, to some degree, put aside the geopolitical, I think the reaction to high prices has already begun, and
we will see it in terms of demand and supply. So will prices spike
higher? It depends upon events. It depends upon economic growth.
It depends a lot upon the dollar. But I think we are in this break
point world, as I said, when oils position in transportation 5 years
from now is not going to have the absolute dominance that it does
today. Our automobile fleet is going to look different from 5 or 6
years ago than people would have thought 3 years ago.
Senator SESSIONS. Nobody can predict the future, but I think
there are some forces at work that could moderate the surge we
have been seeing. Would you agree with that?
Mr. YERGIN. Yes, absolutely, and I think those forces are already
at work.
Senator SESSIONS. Now, I believe that the average family from
my calculations is paying $100 a month more for gasoline this year
than they were 1 year ago. This is after taxes, after house payment, after basic expenses. The little after-tax money they have is
being depleted dramatically. I think the wealth transfer that is occurring out of the United States is unhealthy for our economy.
That is a factor too. Is it not? For policymakers like us, Dr. Yergin,
this wealth transfer to other countries?
Mr. YERGIN. I think so. We are seeing the kind of balance of the
world economy being reshaped in front of our eyes.
Senator SESSIONS. If there is a choice economically for the health
of the United States economy, it is better produce our oil here,
therefore, churning that money within our economy, than sending
it to Venezuela or some Gulf kingdom.
Mr. YERGIN. Certainly what is it? It is going to be $600 billion.
Would that be the number you would use too? About $600 billion
a year flowing out this year, and if that number was $400 billion,
it would be better for our economy.
Senator SESSIONS. I thank both of you for being here. I think
Chairman Bingaman is not afraid of the truth. He has had a lot
of good panels and a lot of good hearings on these complex issues.
We might as well get serious about it.
As to speculation, I see it as a guy on a desert island. He is dying
of thirst and bugs are biting him and flies are biting him. Some-

35
body wants to shoo away the flies. What they really need to do is
get him some water. I think this economy needs some more oil and
continued reduction in utilization.
I will confess that I think Republicans and a number of Democrats should have moved more quickly on CAFE standards but
prices of oil were not very high. We were not worried about it.
I think Democrats and some Republicans should have allowed
more opening for drilling long ago. The pressure was not so high
then. The prices were not so high.
So I think we both made mistakes. But I do truly believe, Mr.
Chairman, if we use less and produce more, we can beat the speculators and bring some semblance of reality back to this market that
is hurting this country.
The CHAIRMAN. Thank you very much.
Senator Lincoln.
Senator LINCOLN. Thank you, Mr. Chairman. I would like to add
my thanks for you and Senator Domenici bringing this together to
have a good conversation and continuing the conversation of what
our solutions need to be.
We appreciate you two gentlemen in providing your expertise.
We hope that you know that this is not the first or the last time
that we will be calling on you to help solve this problem.
I think that for our options here in terms of policy, we see a lot
of focus on long term because we want to ensure, as Senator Sessions mentioned, that we do not miss these opportunities not just
for what we can do immediately but that there is a lot more we
can do in the long term that will hopefully eliminate us seeing a
repeat of what we are going through right now. But this problem
did not occur overnight and it is not going to go awaywe are not
going to solve it overnight. We have to face that reality.
There are some of us, however, that come from States that are
disproportionately low income working families, and they do need
immediate relief. You all have mentioned certain things like cold
starts, lead foot, tire checking, and other things like that. I am just
curious to see if you have any other silver bullets that might be
helpful to us, particularly for these low income working families
that are getting hit really hard.
I noticed in my State just over the Fourth of July, I took my kids
to the lake, and listening to the radio, the radio announcers were
pleading with people to please look at their gas gauges because
there were so many cars that were on the side of the road out of
gas, families who had nothing else to spend. This was their holiday. This was their time with their family, and yet, they were just
trying to get home on that last little ounce of gas that they had
and could not make it.
So you have got a lot of people in dire straits out there in this
country. When we get into talking about solutions, we kind forget
that they are choosing between fuel and food and whether their
kids are going to get to play Little League this summer, or a whole
host of other things. So that, with the increased price of food, we
have got a real situation on our hands. So if you have got any other
ideas of how we protect low income in this circumstance that we
find ourselves in.

36
Also, if we were to move to an emergency situation, which I
think we should, here in the Congress and take this as an emergency situation and begin to look at both the long-term solutions
and the short-term solutions, what role do renewables play? We
keep saying that is way out there, that is way out there.
I have got an automobile parts plant that is going dormant right
now. I mean, how unrealistic is it that we would look to automobile
makers that are downsizing and taking plants dormantcan we
not look toward maybe the production of greater fuel efficient vehicles, as well as the production of renewable fuel use vehicles, converted vehicles? I had a lot of farmers, when I was growing up,
that used propane in their trucks.
How quickly can we move to some of those interim solutions as
we look toward increasing our ability to really see a fleet of vehicles that are more dependent or at least somewhat dependent on
renewable fuels and the use of renewable fuels?
Mr. YERGIN. First, as you make clear, the abstract numbers
about oil prices and share of family incomes do come down to very
painful issues for many, many families across the country who are
really living every day the oil shock. So I think that goes back to
what Senator Bingaman was talking about. The value of an intensive information campaign is both the macro effects in terms of
helping to moderate oil prices and the individual family effects of
helping people manage their energy budget.
Renewables. I am just in that section of my new book writing the
chapter about renewables so I have been thinking very hard about
it and the work that we have done on it. I think in a way we are
crossing the divide that renewables are going to be a biggerthey
will become almost conventional as time goes on, and I think particularly notable is wind, which does not address transportation
but really is growing quite substantially.
Senator LINCOLN. It produces electricity.
Mr. YERGIN. Yes.
Senator LINCOLN. If we have electric cars.
Mr. YERGIN. Yes.
So I think that I have never seen so much emphasis on innovation across the energy spectrum, and that includes the renewables.
So I think we have to keep in mind the scale of our overall energy
system, that you can have dramatic growth and it is still a relatively small part.
On renewable fuels, today about 5 percent of our gasoline is renewable fuels. So if you look at that, a half million barrels a day
is in itself a significant number, much higher than it was just a
few years ago.
Senator LINCOLN. But is it feasible to think we can speed that
clock up? What is the biggest obstacle to speeding that clock up?
Delivering it to the consumer, providing the research, getting the
automobiles retrofitted or
Mr. YERGIN. A lot of different technologies are under the heading
of renewables. I think it is what has already been addressed in this
question, getting to the second or third generation of biofuels, and
there is a lot of debate, even in the scientific community, about
what the timing of that is going to be. I personally do think that

37
biology will probably play a bigger role in energy 10 years from
now
Senator LINCOLN. Sure. We are looking at algae now as a feedstock.
But what I am asking you is, is there any one thing that you
would say or recommend that would speed up the clock of getting
us to the idea that I am going to be able to pull up to a pump
somewhere and plug in my car or fill up my tank with a renewable
fuel that comes cellulosic ethanol or algae or switchgrass or whatever?
Mr. YERGIN. I think it comes down to research dollars and concentration of research dollars and making a lot of different bets
rather than just betting on one particular thing. But I think people
are awfully motivated to do that.
Senator LINCOLN. So if we could get those speculators to invest
in that market, then maybe it might move quicker?
Mr. YERGIN. I think it is some of the same people. The speculators also some of your innovators.
Senator LINCOLN. Can I ask just one last question, Mr. Chairman, just quickly?
The CHAIRMAN. Yes, go right ahead.
Senator LINCOLN. Thank you.
We have seen certainly the sharp increase in the consumption of
oil by China and India. Are there any tools in our tool box right
now that are available to us to help us address the stress on energy
demand on an international level?
Mr. YERGIN. Let me jump in there because I do think that that
is a very central question because that is where the dynamo of
growth is. I think it is striking that the Chinese themselves have
put efficiency at the top of their list for energy. I think over the
last couple years, we have observed a shift in how they are looking
at it. I think the degree to which we canit is happening, but intensively tie them into the research and what we are doing in
terms of innovation, that is in our interest as well as it is in their
interest.
The degree to whichand I think some of this has happened already. The Chinese in particular, but the Indians too, need to feel
confident that the kind of international energy security system that
exists around the IEA would work for them too, that it is not
rigged against them in terms of a crisis. The degree to which the
Chinese come and we come to see that we are actually large importing consumers on the same side of the table and have similar
interests in stable markets, similar interests in not seeing these
kind of prices that we are seeing today, I think that will be beneficial. So it is an economic question. It is also very much a question
of our overall relations.
Mr. DIWAN. I can add just one element to that. I totally agree.
The question is how do you bring the consumers together to really
think about it. In a way, the IEA is a little bit of an odd organization. It has been created 25 years ago as an OECD member. Why
the big consumers are not really part and members of that organization? Why do we not transfer the IEA into a real consumer organization which can address these issues with India, China, Brazil
inside rather than invited from time to time as guests?

38
Senator LINCOLN. Thank you, Mr. Chairman.
The CHAIRMAN. All right. Thank you.
Senator Cantwell.
Senator CANTWELL. Thank you, Mr. Chairman.
Mr. Yergin, good to see you. Mr. Diwan, thank you for your testimony. I appreciate, Mr. Diwan, you saying that you think that the
market is no longer controlled by supply and demand fundamentals. Mr. Yergin, thank you for dwelling on the asset class issue
and talking about the need for more transparency. I appreciate
that very much, and I will get to that question.
But I have another questionwe have a colleague who says the
reason we should drill more is because it will have a psychological
effect. The Energy Information Administration said it is not going
to have much of an impact before 2030 and not much of a significant impact after that as well. So I am asking you what you think
about this notion of whether saying that we are going to drill more
would have that psychological effect.
When we opened up Lease 181 in December 2006, which is 6 million acres, a lot of people were saying it was going to be the most
promising area for new production. Oil was at $57 a barrel, and we
know where it is today. So, obviously, that in and of itself did not
have much of a psychological effect.
There were 500 million acres that were recently put out for bid
on the Gulf of Mexico, and I think companies bid on 200 million
of them. Apparently companies are not ready for more drilling even
though prices are high.
So what do you think of this notion of a psychological impact? I
will let you start with that.
Mr. YERGIN. I think the word I would use is expectations, and
I think that what happens with supply in the United States is part
of this larger picture and larger framework of expectations. So if
it appeared that there is the potential of more supply from the
United States, as perhaps more supply from other countries, that
that would be part of changing this kind of shortage psychology
that seems to dominate the market today, which Mr. Diwan described.
Senator CANTWELL. Since there really is not a serious amount of
supply in the United States and it is more expensive to get, will
lifting the moratoria really have an effect on price?
Mr. YERGIN. I think the answer is we do not know. I think before
we mentioned the example of Brazil. Ten years ago when Brazil
was talking about opening their offshore, no one contemplated that
there might be a new North Sea off Brazil. No one would, I think,
speculate today that there is a new North Sea somewhere off the
coast of the United States. But truly you do not know until you
have done some exploration, and the technological revolution in the
offshore is sort of space age. It is very different than it was 10 or
20 years ago.
Senator CANTWELL. I am just really struck by your answer to
Senator Bingaman that you could reduce oil demand by 600,000 to
700,000 barrels a day, essentially overnight, here in the United
States by simply implementing measures like filling car tires.
Mr. YERGIN. I know. It sounds like tips.

39
Senator CANTWELL. The 600,000 barrels a day is three times
what the Energy Information Administration says we would get in
2030 from lifting the moratoria. This is overnight juxtaposed to
something that could take place in 2030. So it seems to me that
this notion of some psychological effect is basically a specious argument. Some of our colleagues are trying to sell the idea to people
that lifting the moratoria is going to have some immediate effect
when we really cannot affect the supply price here much in the
United States, given our OCS resources.
Mr. YERGIN. I think I am not familiar with the specific estimates
of the EIA. You look at the history of exploration around the world,
you see examples where you have $2 billion dry holes off the
United States. You also see examples where people are quite surprised to see additional supplies that they did not anticipate. Often
when people first discover a field, the reserves are here. As time
goes on, the reserve number grows as the knowledge of the field
grows.
But I know I would go back to where I started. To me it is not
an either/or question. I mean, I think addressing the demand question quickly is extremely important, efficiency. But I think the supply is also part of the picture. We are not going to discover probably a new Persian Gulf off the United States. So it is only going
to be part of this overall supply picture.
Senator CANTWELL. Yes, Mr. Diwan.
Mr. DIWAN. If I can just talk a little bit about expectation. It is
very difficult to judge expectation. Clearly, if you believe that there
will be more oil in 10 years in the United States has a lot less impact as your expectation of oil prices for tomorrow if you believe
that we are going to go bomb Iran. So you are constantly looking
at the whole range of expectation with some short lead time versus
a very long lead time, and it is very difficult to say this has had
this impact versus that had that impact. Clearly, when an Israeli
minister says bombing Iran is unavoidable, it has a big impact on
the oil market versus opening a lease which might produce oil in
10 years. So we constantly need to juggle and understand a little
bit how did the market react to these issues.
Senator CANTWELL. What would be the psychological impact of
saying to the futures market that we are truly going to have transparency on all U.S. trades?
Mr. DIWAN. I would not know how to answer that.
Senator CANTWELL. You do not think it would have an impact?
Mr. DIWAN. If you
Senator CANTWELL. Dr. Yergin.
Mr. YERGIN. The question again?
Senator CANTWELL. Do you think saying to the futures market
that you are going to have transparency on all U.S. traded oil futures would have an impact on the market?
Mr. YERGIN. Yes.
Senator CANTWELL. Thank you.
The CHAIRMAN. Senator Menendez.
Senator MENENDEZ. Thank you, Mr. Chairman.
Thank you both for sharing your knowledge and for your staying
power. I know you have had almost 2 and a half hours of this. So
I want to thank you for that as well.

40
I want to get back to some of your fundamentals so we can put
all of your answers in context. You basically have made the case
that, as it relates to oil, this is a world market. It is a global market. That means that global production is part of the element. Is
that fair?
Mr. YERGIN. Yes.
Senator MENENDEZ. That means that global demand is part of
the element.
I would add a third element I think that you have referred to,
which is global events, so that if you have unrest in Nigeria or if
you have a hurricane in the Gulf, all of those things can affect
prices. Is that fair to say?
Mr. YERGIN. Yes.
Senator MENENDEZ. All right. So with that having been said
then, the fact is that how you affect these different elements are
in some ways on the fringe unless you can have a massive effort
either in the demand, reduction, or a massive effort in the production side, or if you could somehow calm the waters in a way that
there would never be any uncertainty.
So I think it is because of what you have said about how this is
a global context that to some degree explains why even though we
opened up Lease 181 about a year and a half or 2 years ago, gas
prices still went up. Even though Americans have reduced 800,000
barrels a day as a result of higher gas prices and the Saudis have
produced 500,000 barrels more a day, a total shift of about 1.3 million, gas prices have still gone up. So is that a fair way of looking
at this set of circumstances?
Mr. DIWAN. Yes. It is really a global picture.
Senator MENENDEZ. So, therefore, the suggestion by some who
would have us believe that, for example, opening up the outer continental shelf tomorrow would immediately reduce gas prices today,
would be a falsehood, would it not?
Mr. DIWAN. Yes.
Senator MENENDEZ. Now, I think you made comments before
that part of our challenge here, another element of this challenge,
is that because oil prices were lower during a period of time, investments in the necessary critical infrastructure to both drill, refine, lay the labyrinth of oil lines necessary and do all of the elements of what it takes to bring oil to the marketplace were not
made. Is that fair to say?
Mr. YERGIN. They were made but there was a contraction going
on, and particularly when you had two price collapses of $10 a barrel. The last price collapse was in 1998 just a couple of years before
this huge demand surge started.
Senator MENENDEZ. So the investments did not keep pace ultimately with how this explosion took place.
Mr. YERGIN. That is right.
Senator MENENDEZ. In fact, we saw a lot of the resources by the
companies, as they were making significant record profits, in buying back their own stocks, but not necessarily making the rate of
investment necessary to pursue the type of production necessary.
Mr. YERGIN. But I think if you look back to that period in 1998
2000 when you had the price collapse, what they were very preoccupied was with downsizing to accommodate what was expected

41
to be a low price environment for some time to come. The high
profits that you are mentioning really came when we went into this
period of much higher prices and high demand.
Senator MENENDEZ. But it is true that much more was made in
buying back stocks than it was in investments, if you look at the
relative amounts.
Mr. DIWAN. Buy-back of stocks were quite high when prices really increased, and one of the reasons is actually the lack of
investable options for some of these very large companies because
they did not have access to these very prolific basins we are talking
about. It is a scale issue.
Senator MENENDEZ. Now, because oil is, in fact, sold on the
world marketplace, production does not guarantee it will get sold
to the highest bidder, generally speaking. Is that not true?
Mr. YERGIN. I am sorry. I did not hear the
Senator MENENDEZ. Because oil is a world market, is production
largely not sold to the highest bidder?
Mr. YERGIN. Yes.
Senator MENENDEZ. So if that is the case, and then we also look
at the Energy Information Agency talking about the 68 million
acres that is out there, I mean, I would say that, first, they do
some surveythe Minerals Management Agency does some survey
of this to give some sense of what is the opportunity. Of course,
companies pursue what they believe is a reasonable opportunity.
As you say, there may be some dry wells, but there is also the expectation that they will find opportunities. People just do not buy
up leases for the sake of buying leases. Is that fair to say?
Mr. YERGIN. They acquire sort of public data and, on the basis
of that, decide they will bid here and not there. Then if they win
the lease, then they go through a much more extensive period of
analysis.
Senator MENENDEZ. Is not cheaper to drill on land than it is offshore?
Mr. YERGIN. Yes.
Senator MENENDEZ. Now, finally, let me ask you two last questions. Is it not critical, in order for us to deal with this longer-range
issue that you both talked about as part of it, that demand reduction, Dr. Yergin, you said could be probably the single most significant thing we can do in the short term, but in the long term, as
we look for renewables, is having the tax incentives necessary to
bring these renewables to the commercialization aspect not a critical element of meeting this challenge?
Mr. YERGIN. I think without the incentives that we have had sort
of on and off since 1974 for renewables, I do not think we would
see the renewable industry where it is today.
Senator MENENDEZ. In fact, creating a greater stability of understanding that those incentives are going to be there over the longer
term would, in fact, help us commercialize a lot quicker. Would
that not be true?
Mr. YERGIN. Are you talking about
Senator MENENDEZ. The stability of the tax incentives.
Mr. YERGIN. I think, in general, stability of a tax regime in any
branch of the energy industry promotes investment.

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Senator MENENDEZ. Finally, the Securities and Exchange Commission has a proposed rulemaking that would allow oil companies
to report reserves where they have not done any test wells. It also
creates new classes of potential reserves and not just having oil
companies report proven reserves.
My question would be would this rule not make the leases that
oil companies hold, but are not producing, more valuable?
Mr. DIWAN. What you have right now in a way is oil companies
keep two books of reserves, the official SEC one and the one that
they look at what is potential. I mean, you drill two wells. You find
oil in both of them, and you know there is oil in the middle. You
cannot book it under the SEC rule. Oil companies know there is
oil in the middle. So they book it internally and they plan their
next well. So what the SEC rules are doing in a way is coming closer to how the industry itself looks at its reserves.
Senator MENENDEZ. But clearly, there is
Mr. YERGIN. Senator, could I
Senator MENENDEZ. Yes, Dr. Yergin.
Mr. YERGIN. That adjustment by the SEC is absolutely on target
because basically the rules forthis all goes back to what you are
talking about now about understanding the financial markets. The
rules for reserves were created in the 1970s so that, among other
things, we would have a better sense as a country of what is our
reserve base, and then it was also adapted for the uses of investors.
The thing is that the techniques that were used were the techniques of the 1970s when the deep water frontier was 600 feet, and
today it is 12,000 feet. So what the SEC is basically doing is modernizing a set of rules that were outmoded by vast changes in technology.
Senator MENENDEZ. I appreciate your answer, but could you answer the other part of the question? Will that not ultimately improve the value of that companys stocks by virtue of that reporting?
Mr. YERGIN. You said stocks or their ability to book reserves?
Senator MENENDEZ. Stocks.
Mr. YERGIN. Yes. Since investors judge oil companies and gas
companies by their reserves and if their reserves capture what is
there with modern technology, that would enhance their value.
Senator MENENDEZ. But that would do nothing, in fact, however,
to necessarily increase supply.
Mr. YERGIN. It would do two things. One, it might increase their
foundation for investment. Second, it meets the needs of investors
by giving them a more accurate view of the companies.
Senator MENENDEZ. That would presume, however, that the investment would flow, that the moneys would flow, that the new
higher stock price would flow not to create dividends but to plow
back into investments.
Mr. YERGIN. I think like all companies, they have their obligations to do both. I think the point that Mr. Diwan made is a really
important one and it goes back to this 80 percent of the worlds resources are controlled by national oil companies. On a global basis,
this question of access is critical for helping to bring on an investment into new resources.

43
Mr. DIWAN. I agree. I mean, just to come back to your question
on the value of the company, a lot of the American companies who
are ruled by these SEC rules, I mean, literally keep two books, one,
in view of the technology that we have today, and often the analysts and the investors know these numbers. So there is not a huge
discrepancy, if you want, with what they are putting in the SEC
and what is known of their own reserve. So often people investing
in these companies know what the company thinks about its own
reserve even if it is not the way the SEC books it.
Senator MENENDEZ. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much.
Senator Whitehouse, you are the final Senator here who has not
had a chance to ask some questions. I know Senator Domenici
wants to make a statement. Maybe Senator Conrad or Senator
Murkowski have other questions. But go ahead.
Senator WHITEHOUSE. I appreciate it, Mr. Chairman, and I thank
you and the ranking member for allowing people from outside the
committee to participate in this important hearing. It is a very nice
thing.
I just wanted to ask the two witnesses, given the emphasis on
conservation, given the questions and the figures that Senator
Cantwell had, what advice would you have for us as a Congress as
to ways to increase conservation and encourage greater conservation? I do not see us policing the tire inflation of Americas drivers.
What are the best ways? Have you thought of ways for us to try
to get our hands around the conservation opportunity, and what
are the best recommendations that you have?
Mr. YERGIN. Obviously, Senator Conrad went through the list of
things that you have done. I think it would be a question of examining, indeed, in the area of incentives, regulations, technology, just
what are the panoply of things that can have an impact. The problem with conservation, the biggest single issue, is it not a thing.
It is so diverse. So it is really how do you get the signals and the
directions to move there.
Now, obviously, we recognize price is one way to do that.
So I do not have a list of specific things to do. I did mention just
these short-term measures that have an impact. But I presume
that this committee has looked at that and would say that is something to really kind of focus on, what is the inventory. If we just
think about inventory of resources, what is the inventory of efficiency resources that we have.
Senator WHITEHOUSE. If you have a chance to, I would be delighted if you followed up on that after the hearing. It is something
worth thinking a lot about.
Mr. YERGIN. I should say that we, within our company, have created a group that is trying to focus on how do you capture the efficiency potential that I think we are all convinced is there.
Senator WHITEHOUSE. Just one last quick question. I do not
know. This may be a very quick answer. A measure of the run-up
in oil prices for the U.S. has been the decline in the value of the
dollar. As the dollar falls, oil prices increase. As oil prices increase,
it has a weakening effect on the economy. The weakening effect on
the economy can, in turn, cause the dollar to slip further. There is
a potential negative feedback loop that could develop there, and I

44
am wondering how robust you feel that negative feedback loop is,
or are there enough off-ramps on it that it is not something we
need to worry about?
Mr. YERGIN. Yes, I would just say that I think you are absolutely
right. What is the opposite of a virtuous circle?
Senator WHITEHOUSE. Vicious cycle.
Mr. YERGIN. A vicious cycle. That is partly getting into a cycle
of stagflation, but I think that that is what we are actually seeing
today and you see the divergence between the Federal Reserve and
the European Central Bank and how they are kind of addressing
these questions. So it does reinforce itself, and that is part of the
reason, you know, the severity of this oil shock we are in and the
kind of risks that we are carrying.
Senator WHITEHOUSE. Conservation would help interrupt that
negative feedback cycle.
Mr. YERGIN. Absolutely.
Mr. DIWAN. In the short term, if I can add to that, I think this
is the key driver of oil prices now. It is the perception of what the
central bankers are doing about inflation. That is the most important fundamental in the driver of prices. This distinction we have
what the central banks in Europe and the U.S. are doing, where
we are fighting inflation in Europe and we are trying to promote
growth here, is creating the further weakening of the dollar and
further money coming to the oil complex. That is a very powerful
cycle which has established itself in the last year.
Mr. YERGIN. If you look at gold, if you look at the other commodities, exactly what Mr. Diwan is describing, you have an inflationary cycle. Now, if you are outside the United States, you have
a very strong sense of everywhere people are preoccupied with inflation. That is a time when commodity prices go up also.
The CHAIRMAN. Senator Domenici, did you have a statement you
wished to make here? I know Senator Murkowski has a question.
Maybe Senator Conrad has a question.
Senator DOMENICI. I have a combination observation and question.
I would be remiss if I did not, once again, thank you both. We
are pretty fortunate as a groupwe, Senatorsto have somebody
of your quality give us a whole morning. I have not been here all
morning. So I do not know what torture you have been through,
but you both are smiling. So it must not have been too bad a morning.
I have come to the conclusion that right here at the end of this
year with the President lifting, by executive order, the executive
moratorium on all of the offshore lands, coastal lands of America,
and giving the Congress an opportunity to do likewise in whole or
in partit seems to me we can talk all we like about speculation
and we can debate speculation on the floor.
But I sense that the policy decision that we ought to make is to
open as much of that offshore to production, and some of the American people are putting it in very simple language. They want some
drilling on American property that is not taking place now. They
do not even want us to use the sophisticated words of exploration.
They say, drill. So I think we are free to use the word now. We

45
were all scared of it 6 months ago, but it looks like Americans are
saying that in larger and larger numbers.
I am not trying to talk like I know the answer to this problem.
This is the worst economic problem America has ever had in my
36 years. I think it is capable of destroying us. It is capable of making us poor. If we have to do it at a full-blown high level, $500 billion to $700 billion a year for 8 or 9 years, I do not think we can
make it. I think something will happen. I am not going to ask you
all that. I just will be satisfied in my own mind that it is a very
big problem.
I think we ought to go after the offshore and the Alaskan that
is available right now with a vengeance, and we ought to pass
whatever is necessary to open it up and see what happens.
Now, let me just stop for a minute and say, am I being irrational
as I look at what is coming in and have worked on this for so long,
passed three very important bills? You know that. They are the important ones in the last few years. All three are the result of Senator Bingaman and Domenici working together. We had other Senators, obviously, but we did CAFE. We have done all the things we
should have done 20 years ago. We have done them.
The price is so high that between all of them, we are conserving
like hell. I mean, we have never had such a big conservation effort
without it being mobilized. Senators are talking about mobilizing
it. It is taking effect. The price plus the things we put into law are
causing us to lower dramatically our use. It could come down more.
But I ask you, am I on the wrong track in saying let us proceed
to get some of these properties released so they can put them out
to bid and get started with the world knowing they are open?
My whole goal is to pass laws up here that can say to you two
menyou are writing your second book and you are saying, well,
where are the new supplies? You can at least start with saying
America has opened up the offshore and it is open. It is going to
be used sooner or later here. I think it would be an important adjunct to anybodys analysis of where we are and what we ought to
do. Am I mistaken or not?
I want to say just before that, you have all told usif 200,000
barrels of Nigerian available got all messed up in a war, you tell
us it has an impact on the market. Why would 200,000 barrels of
new oil and X million cubic feet of gas that are going to be put on
the market by America on American property not have an impact
on the price, as would the Nigerian situation with 200,000 barrels?
Mr. YERGIN. As I have tried to say, I think that a responsible
further development of the OCS or part of the OCS is part of the
overall picture. That is, it is supply and demand. We have got to
look at both of them.
I do not think that you are irrational at all in the larger concern
that you are expressing. I mean, you have been through several of
these cycles now, Senator. You know, wherever we are now, the
risks of this could be worse. We could be looking at a worse situation. You can just go down the checklist of risks. There are a lot
of them there today. So I do not think any of us would want to say
you are irrational.
Senator DOMENICI. What do you think?

46
Mr. DIWAN. We have been saying that we need to increase supply, and we need to increase supply everywhere. So I do not see
how we can ask certain countries to do it only for us. We can decide
the environmental standard we want to impose on these leases. We
can change them. We can tighten them if need be. But increase
supply globally is a good thing and globally includes the United
States.
Senator DOMENICI. I am going to close by stating in the record
there is a new observation taking place by some Senators, and I
am not being critical of them. That is good. They think they have
found something here. They say these people that have leases, all
these companies that have leases on the offshore, are going to either have to use it or lose it. I want to state for the record one
more time they are subject to a use it or lose it. I see you nodding
affirmatively. Every one of those leases says they are either for 5
years or 8 years or 10 years. In the lease, it says if you do not start
producing by the terminal date, you lose the lease. So that is a use
it already. We do not have land out there that they can hold indefinitely and not use. They have to use it by the date on the lease
or they lose it. So what we do is we have them out there doing the
best they can to analyze.
They just bid a bid on one piece of the offshore which must have
hit both of your laptops with a pretty big bang, and that was the
biding that was put forth on that little piece of property that we
opened off of Florida. That was the highest bids we have had for
any American leases in history. So they must think there is oil and
gas there. Somebody says, why are they not producing it? They did
not buy it to lose it. They are going to do it.
Mr. YERGIN. Also, one has to remember there are lead times
here. There is a clock ticking, but you have to mobilize. You have
to get the drill ships. You have to do the research. You have to do
the seismic and all of that.
Senator DOMENICI. Thank you very much.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Murkowski, why do you not go ahead?
Senator MURKOWSKI. A very quick question. Gentlemen, again, I
appreciate your endurance.
I have suggested that if the Congress were to lift the decadesold ban on ANWR and open that up for exploration and production,
that even though the time for development may be 810 years off,
that there would be a psychological impact to the market, that that
would be a signal that increased production is on the way.
Senator Cantwell in her comments to you kind of challenged you
on the aspect of the psychology, and you spoke to maybe it is psychology, maybe it is expectations.
A couple of days ago when President Bush lifted the ban on OCS
development, 2 days after his announcement, the prices of crude
fell by $9.26 or 6.3 percent. What is that? Is that psychology? Is
that expectation? I mean, what happened there? Am I right or is
Senator Cantwell right? Or are you guys right?
Mr. DIWAN. I think it is very difficult to assign one cause for oil
prices dropping like that over 2 days. I can come up with 20 different reasons, including the announcement that the United States
will be negotiating directly with Iran. We can also look at what

47
happened on the broader market and the fact that you had a very
big sell-off, and some of these financial players had made money
on oil and really needed cash to pay off what they were losing on
the other side. So we can come up with 10 or 15 reasons. Somebody
like me who has been looking at oil markets for very long has a
lot of trouble to accept there is one reason why thousands of people
are going to do exactly the same thing at the same moment, selling
oil.
Senator MURKOWSKI. But he makes an announcement and it
drops by almost $10. Is that the signal that the market was looking
for that there might be increased production and we respond to
that? Is it psychology? Is it expectation? What is it?
Mr. DIWAN. No, it is not. I think announcing that Bill Burns was
going to Switzerland to talk with the Iranians had a much bigger
impact on the market than announcing that.
Senator MURKOWSKI. Do you agree with that, Dr. Yergin?
Mr. YERGIN. Yes. I think that also probably over the last couple
of days, that sell-off, that sort of pessimism about the U.S. economy
was a big factor.
Senator MURKOWSKI. So it is a combination.
Mr. YERGIN. It is a combination. It is all of the above.
Senator MURKOWSKI. So we are all right.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Conrad.
Senator CONRAD. I think that is the truth.
[Laughter.]
Senator CONRAD. First of all, I want to thank very, very much
the chairman of this committee and the ranking member for organizing this. A special thanks to Senator Bingaman, the chairman
of the Energy committee, for really two outstanding witnesses. I do
not know how many Senators we had here. I think more than 30.
Perhaps as many as 40 Senators were here.
Some of us had hoped that we would have an actual time out in
the Senate for a thing like this because we had competing hearings
going on while Senator Bingaman was conducting this workshop.
I know committees on which I sit were meeting. I wish we would
have had a time out so that others could have been here because
this is exactly what we needed to hear.
To the witnesses, we want to thank you for really I think outstanding presentations, and we are very fortunate to have people
of your quality who are willing to take some time to be here to answer our questions.
I thought, Mr. Diwanis that the correct pronunciation?
Mr. DIWAN. Diwan.
Senator CONRAD. Diwan. Thank you. Mr. Diwan, at one point
you talked about speculation, but you talked about at the heart of
this is that over the last period of time, we have encouraged consumption and we have discouraged production. That takes us to
where we find ourselves today. We have encouraged consumption.
We have discouraged production. I mean, we have actually had tax
credits to encourage people to go buy Hummers. What a bizarre
policy that was. We had tax credits to encourage people to buy
Hummers that give 8 miles a gallon or whatever it is. At the same
time, we have held places were off limits to production.

48
While it is obvious that we are in a global market and what we
do on both of these equations will not be central to the overall
equation, you also said that our fuel efficiency is one-half of Europe. It just seems to me it is so abundantly clear that we should
work both sides of this equation. We should affect what we can affect. We should have more production. We should allow more access
to this resource, and we should conserve more. We should accelerate what we did on CAFE standards last year to increase fuel efficiency because we are way behind. We are way behind.
You indicated we are consuming half of the worlds gasoline, Mr.
Diwan, as I recall. You said your conclusion was it is us. It is us.
We are the ones who are in charge of our own destiny. I hope very
much the message that comes out of this is as clear as your testimony has been because as I have heard you say it, yes, speculation
is part of what is occurring here, that we have a whole new series
of actors that have come to this market with deep pockets who
have put pressure on prices in the short term.
But it is also true that we have had a set of policies that have
discouraged production and encouraged consumption, and we have
to reverse those. Did I hear you correctly?
Mr. DIWAN. Yes.
Senator CONRAD. Dr. Yergin, do you agree with that prescription,
that we have got to reverse the longstanding policies we have had
here to discourage production and encourage consumption, that we
have got to go in just the reverse, that we have now got to encourage production and discourage consumption?
Mr. YERGIN. Yes.
Senator CONRAD. I do not know what could be more clear.
Some of our colleagues just want to play on half the ball field.
I mean, in both parties, I hear people that just want to deal on the
consumption side and others who just want to deal on the production side. As far as I am concerned, both of them have it half right.
Both of them have it half right.
What we need is to get a strategy and a plan that deals with
both sides of the equation. Now, maybe that is too simplistic, but
it seems to me kind of basic. I think the testimony of you gentlemen has been about as clear as it can be. I appreciate it very much.
I thank the chairman.
The CHAIRMAN. Let me just also thank both of you. I think it has
been very good testimony, very informative. I think a lot of Senators obviously have a vital interest in trying to find reasonable solutions, and I think you helped us. So thank you all very much.
Why dont we conclude our workshop with that? Thank you.
[Whereupon, at 11:55 a.m., the workshop was concluded.]